1 Derive an individual demand curve from utility-maximizing adjustments to changes in price Derive the market demand curve from the demand curves of individuals Explain the substitution and income effects of a price change Explain the concepts of normal and inferior goods in terms of the income effect Choices that maximize utility—that is, choices that follow the marginal decision rule—generally produce downward-sloping demand curves This section shows how an individual’s utility-maximizing choices can lead to a demand curve Deriving an Individual’s Demand Curve Suppose, for simplicity, that Mary Andrews consumes only apples, denoted by the letter A, and oranges, denoted by the letter O Apples cost $2 per pound and oranges cost $1 per pound, and her budget allows her to spend $20 per month on the two goods We assume that Ms Andrews will adjust her consumption so that the utility-maximizing condition holds for the two goods: The ratio of marginal utility to price is the same for apples and oranges That is, Equation 7.4 MUA=MUO $2 $1 Here MUA and MUO are the marginal utilities of apples and oranges, respectively Her spending equals her budget of $20 per month; suppose she buys pounds of apples and 10 of oranges Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 366