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The Analysis of Consumer Choice

3. Utility Maximization and Demand

LEARNING OBJECTIVES

  1. Derive an individual demand curve from utility-maximizing adjustments to changes in price.
  2. Derive the market demand curve from the demand curves of individuals.
  3. Explain the substitution and income effects of a price change.
  4. 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.