# Demand Curves Graphical Derivation In this part of the diagram we have drawn the choice between x on the horizontal axis and y on the vertical axis.

## Presentation on theme: "Demand Curves Graphical Derivation In this part of the diagram we have drawn the choice between x on the horizontal axis and y on the vertical axis."— Presentation transcript:

Demand Curves Graphical Derivation

In this part of the diagram we have drawn the choice between x on the horizontal axis and y on the vertical axis. Soon we will draw an indifference curve in here. Down below we have drawn the relationship between x and its price P x. This is effectively the space in which we draw the demand curve. We start with the following diagram x y pxpx x

Next we draw in the indifference curves showing the consumers tastes for x and y. Then we draw in the budget constraint and find the initial equilibrium x0x0 y0y0 x pxpx x y

Recall the slope of the budget constraint is: x pxpx x y x0x0 y0y0

From the initial equilibrium we can find the first point on the demand curve Projecting x 0 into the diagram below, we map the demand for x at p x 0 x0x0 y0y0 x pxpx x y px0px0

Next consider a rise in the price of x, to p x 1. This causes the budget constraint to swing in as –p x 1 /p y 0 is greater To find the demand for x at the new price we locate the new equilibrium quantity of x demanded. Then we drop a line down from this point to the lower diagram. This shows us the new level of demand at p 1 x x0x0 y0y0 x pxpx x y px0px0 x1x1 px1px1 x1x1

We are now in a position to draw the ordinary Demand Curve x0x0 y0y0 x0x0 px0px0 x1x1 x1x1 px1px1 First we highlight the the p x and x combinations we have found in the lower diagram. DxDx And then connect them with a line. This is the Marshallian demand curve for x x y pxpx x

In the diagrams above we have drawn our demand curve as a nice downward sloping curve. Will this always be the case? Consider the case of perfect Complements - (Leontief Indifference Curve) e.g. Left and Right Shoes

x y pxpx x0x0 y0y0 Leontief Indifference Curves- Perfect Complements Again projecting x 0 into the diagram below, we map the demand for x at p 0 x x0x0 px0px0

x0x0 y0y0 x0x0 px0px0 Again considering a rise in the price of x, to p x 1 the budget constraint swings in. We locate the new equilibrium quantity of x demanded and then drop a line down from this point to the lower diagram. x1x1 x1x1 px1px1 This shows us the new level of demand at p 1 x x y pxpx x

x0x0 y0y0 x0x0 px0px0 x1x1 x1x1 px1px1 Again we highlight the the p x and x combinations we have found in the lower diagram and derive the demand curve. x y pxpx x

Perfect Substitutes x y pxpx x

Putting in the Budget constraint we get: Where is the utility maximising point here? x y pxpx x And hence the demand for x = 0 px0px0

The budget constraint would swing out x0x0 y0y0 x0x0 Suppose now that the price of x were to fall Q: What is the best point now? The demand curve is just a straight line px1px1 A: Anywhere on the whole line x y pxpx x px0px0

At price below p x 1 what will happen? Now budget constraint pivots out from y axis x0x0 y0y0 x0x0 px1px1 x y pxpx x px0px0 So at all prices less than p x 1 demand is x max And the best consumption point is x max

x max (the best consumption point) moves out as price falls As price decreases further, what will happen? x0x0 y0y0 x0x0 px1px1 x y pxpx x px0px0

So here the demand curve does not take the usual nice smooth downward sloping shape. Q: What determines the shape of the demand curve? A: The shape of the indifference curves. Q: What properties must indifference curve have to give us sensible looking demand curves?

Download ppt "Demand Curves Graphical Derivation In this part of the diagram we have drawn the choice between x on the horizontal axis and y on the vertical axis."

Similar presentations