OS82 ECON1010 DEMAND IN A PERFECTLY COMPETITVE MARKET DEMAND CURVE FOR AN INDIVIDUAL Demand Curve: Represents the relationship between the price of a good or service and the quantity demanded of that good or service. Utility: denotes the satisfaction that an individual derives from consuming a given good or taking a certain action. It is measured in utils per unit of time. Marginal utility is the additional utility gained from consuming an additional unit of good in a given period of time Decreasing Marginal Utility: Impliesthattheutilityfrom consuming an extraunit ofa given good decreases with the number of units that have been previously consumed. Quantity Demanded: represents the quantity of a given good or service that maximises the utility experienced by the individual consuming it Change in quantity demanded following change in price: Substitution Effect: Captures the change in the quantity demanded of a given good following a change in its relative price. Income Effect: Captures the change in the quantity demanded of a given good following the reduction in the consumers purchasing power. Substitution effect: always reducesincreases the quantity consumed of a good following an increasedecrease in its price Income effect can go either way. For a normal good a decreaseincrease in income reducesincreases the quantity consumed. E.g. expensive wine Demand curve shifts rightwards when the incomes of buyers increase and leftwards when the incomes of buyers decrease fast foodferior good a decreaseincrease in income increasesdecreases the quantityconsumed. E.g. Demand curve shifts leftwards when the incomes of buyers increase and rightwards when the incomes of buyers decrease Even when the good is inferior, the substitution effect is almost always stronger than the income effect and so an increase in the price of a good tends to reduce the quantity demanded of that good. In general, price and quantity tend to move in opposite directions Law of Demand; ceteris paribus Law of Demand: Demand curves have the tendency of being downward sloping.