Budget area of the consumer
Consumer Indifference Map shows his subjective attitude to a particular set of goods.
However, the ability of the consumer to satisfy his tastes and preferences, and therefore the demand that he makes in the market, depends on the income available to him and on the prices of the goods concerned.
Both of these factors together determine the area of consumer bundles acceptable to the consumer, or the budget area.
Consumer's budget constraint can be written as an inequality:
P 1 Q 1 + P 2 Q 2 ≤ R
- P 1 P 2 - prices for the corresponding goods Q 1 and Q 2
- R - consumer income
budget line
If the consumer spends his entire income on goods Q1 Q2 then we get the equality:
P 1 Q 1 + P 2 Q 2 = R
Transforming this equality, we get budget line equation, having the form:
The budget line shows the set of combinations of goods Q1 and Q2 that a consumer can purchase by spending all his money income. The slope of the budget line is determined by the ratio P1/P2.
In a multi-commodity economy and taking into account consumer savings, the budget line equation can be written in general form as follows:
P1Q1 + P2Q2 + ... + PnQn + savings = R
Budget Line Shift
Changes in the budget area can be driven by two main factors: changes in income and changes in commodity prices.
Increasing money income from R1 to R2 at constant prices allow the consumer to purchase more of one or the other product. The slope of the budget line will not change because prices remain the same, but the line itself will move up and to the right, parallel to itself. With a decrease in income, the line will shift lower and to the left.
Change in the price of one of the goods with the same income and the price of another good will change the slope of the budget line, equal to the ratio of prices. So, for example, if the price P1 of good Q1 is reduced, the maximum amount of good purchased with a given income increases from R/P11 to R/P12. Accordingly, the slope of the budget line decreases
- with a simultaneous increase in n times and prices P1, P2, and income R, the position of the budget line does not change, and therefore, the area of budget constraints will remain the same.
- an increase in prices by n times is equivalent to a decrease in the consumer's income by the same number of times.
Economic behavior of the consumer
Optimum point
An indifference map is a graphical representation of consumer tastes and preferences.
The budget area shows the totality of goods available to the consumer, that is, his purchasing power. Combining these graphs allows you to answer the question of which product bundle is the best for the consumer.
The bundle of goods that maximizes the total utility of the consumer is called consumer equilibrium point (optimum point) and lies at the point of contact of the budget line and the indifference curve (provided that the product is desirable for the consumer, that is, it has a positive marginal utility).
Optimum conditions
For the optimal consumer bundle, the following conditions are met:- the equilibrium combination of goods (x * 1, x * 2) always lies on the budget line, and not below it. This means that in order to maximize utility, the consumer must make full use of available income (savings are also considered as available for "purchase" goods);
- at the equilibrium point, the slope of the indifference curve is equal to the slope of the budget line, or
The slope of the indifference curve \u003d MRS \u003d - Δx2 / Δx1,
The angle of inclination of the budget line = - P1 / P2.
Consequently, second condition for maximizing utility implies a distribution of income by the consumer in which the marginal rate of substitution of one good for another is equal to the inverse ratio of their prices
MRS = - P1 / P2,
Δх2/ Δх1=Р1/Р2.
The economic meaning of this condition is MRS The tradeoff between good 2 and good 1 determines the level at which the consumer is willing to substitute one good for another. Price ratio ( R1/R2) determines the level at which the consumer can replace good 2 with good 1. Until these levels are equal, exchanges are possible that increase the total utility of the consumer.
The second maximization condition can be written differently. From the definition of marginal utility
MU1= ΔTU/ Δх1;
MU2= ∆TU / ∆x2.
If we divide MU1 by MU2, then we get
MU1/MU2 = Δх2/ Δх1,
MU1/MU2 = P1/P2.
From this follows the equality
MU1/ P1 = MU2/ P2.
In the case of goods, the expression becomes
MU1/P1= MU2/P2 = …= MUn/Pn = MU savings.
This means that the utility maximization conditions derived from indifference curve analysis (the ordinalist way) and from the cardinalist utility model can be written in the same way.
The economic theory of consumer behavior is very simple: Economists believe that consumers choose the best bundle of goods they can afford. In order to give concrete content to this theory, we must describe more precisely what is meant by "better" and what is meant by "can afford". In this chapter, we will focus on exploring the description of what the consumer can afford, and in the next chapter, on the concept of consumer definition of what is "best". After that, we can begin to explore in detail the meaning of this simple model of consumer behavior.
2.1. budget constraint
Let's start by looking at the concept budget constraint. Assume that there is a certain set of goods within which the consumer can make his choice. AT real life there are many goods that are objects of consumption, but for our purposes it is convenient to consider the case of only two goods, since then it is possible to describe the behavior of the consumer in relation to the choice of goods graphically.
Denote consumer set given consumer through ( X 1 , X 2). It's just two numbers telling us how much of item 1, X 1 , and how many goods 2, X 2 , this consumer wants to consume. Sometimes it is convenient to denote a consumer set with just one character, say, X, where X is simply an abbreviation for the specified list of two numbers ( X 1 , X 2).
Suppose we know from observations the prices of these two goods, ( R 1 , R 2), and the amount of money that the consumer can spend, m. Then the consumer's budget constraint can be written as
R 1 X 1 + R 2 X£2 m. (2.1)
Here R 1 X 1 - the amount of money spent by the consumer on product 1, and R 2 X 2 - the amount of money he spends on good 2. The consumer's budget constraint requires that the amount of money spent on both goods does not exceed the total amount of money that this consumer can spend. accessible for the consumer, sets are those that cost no more m. We call this set of available consumer bundles at prices ( R 1 , R 2) and income m budget set this consumer.
2.2. Two items are often enough
The assumption that there are only two goods is more general than one might at first think, since one of the goods can often be considered to represent all other goods that a consumer might want to consume.
For example, if we want to study a consumer's demand for milk, we can denote by X 1 his monthly milk intake in quarts, and through X 2 - all other goods that a given consumer might want to consume.
With this treatment of good 2, it is convenient to think of it as the number of dollars a consumer can spend on all other goods. Under this interpretation, the price of good 2 is automatically equal to 1, since the price of one dollar is a dollar. Thus, the budget constraint takes the form
R 1 X 1 + X£2 m. (2.2)
This expression simply tells us that the amount of money R 1 X 1 spent on good 1 and the amount of money spent on all other goods, X 2 taken together must not exceed the total amount of money m, which can be spent by this consumer.
We say that item 2 represents composite goods, which embodies everything that a given consumer would like to consume, in addition to good 1. As for the algebraic form of the budget constraint, equation (2.2) is just a special case of the formula given by equation (2.1), with R 2 = 1, so that everything that can be said about the budget constraint in general will be true for the treatment of good 2 as a composite one.
2.3. Budget set properties
budget line there are many sets that cost exactly m:
p 1 x 1 + p 2 x 2 = m. (2.3)
These are bundles of goods that consume the entire income of the consumer.
The budget set is shown in Figure 2.1. The bold line represents the budget line - sets costing exactly m; and below this line are sets that cost strictly less m.
BUDGET LIMIT
(budget constraint) Various bundles of goods that can be purchased with a given amount of income at average market prices; the budget constraint can be expressed as a curve on a graph. In consumer theory, a point on a particular person's budget constraint curve that lies simultaneously on their highest indifference curve is the utility maximization point. All of the above applies to both governments and firms facing budget constraints when they have to determine their level of spending.
Business. Dictionary. - M.: "INFRA-M", Publishing house "Ves Mir". Graham Bets, Barry Brindley, S. Williams et al. Osadchaya I.M.. 1998 .
See what "BUDGET LIMIT" is in other dictionaries:
budget constraint- - see Budget line, where its mathematical description is given. The condition that the monetary costs of an economic agent for all goods and services purchased by him cannot exceed his monetary income, that is, go beyond ... ... Economic and Mathematical Dictionary
budget constraint- See Budget line for its mathematical description. The condition that the monetary expenses of an economic agent for all goods and services purchased by him cannot exceed his monetary income, that is, go beyond the budget line. Concept B ... Directory technical translator
- (budget constraint) Cost limit. Every economic agent, be it an individual, a firm or a government, must keep spending within their financial means. Funds to finance expenses can be generated from ... Economic dictionary
Encyclopedic Dictionary of Economics and Law
intertemporal budget constraint- budget constraint in relation to expenditures and receipts for more than one period ... Dictionary of economic terms
A budget constraint with respect to expenditures and receipts for more than one period. Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B. Modern economic dictionary. 2nd ed., rev. M .: INFRA M. 479 s .. 1999 ... Economic dictionary
- (intertemporal budget constraint) The requirement that the total expenditure of an individual, firm or state be carried out within the funds available to them over a sufficiently long period. This period is the lifetime of the individual; for firms... Economic dictionary
- (hard budget constraint) Limiting the costs of any private or state organization when it is expected that the results of exceeding them will be catastrophic. For example, managers whose firms do not cover their expenses or do not ... ... Economic dictionary
- (constrained maximum) The maximum possible value of any function that is constrained by one or more inequalities. For example, a consumer seeks to maximize utility within the budget constraint, i.e., ... ... Economic dictionary
BO- Belokalitvinsk branch of the city of Belaya Kalitva, Rostov region. BO BOHR combat guard BO Dictionaries: Dictionary of abbreviations and abbreviations of the army and special services. Comp. A. A. Shchelokov. M .: AST Publishing House LLC, Geleos Publishing House CJSC, 2003. 318 p., S. ... ... Dictionary of abbreviations and abbreviations
Analyzing consumer behavior, it can be argued that the decision to purchase goods and services is made not only on the basis of the usefulness of a particular product, but also on an assessment of the financial capabilities of the subject, market prices. Prices are determined as a result of the relationship between supply and demand and do not depend on the decisions of an individual subject.
Because of this, the concept of " budget constraint “It is understood as the amount of money that the subject has and which he can direct to the purchase of economic goods. The budget constraint can also be interpreted as various maximum combinations of economic benefits that a subject can acquire with the full expenditure of its budget and existing prices.
To simplify the analysis, we assume that the subject spends his budget on the purchase of two goods. Therefore, the budget constraint is:
.
Quantity of good X obtained by giving up a unit of the good Y, is determined by the slope of the budget line at a given income and prices. The slope of the budget constraint is determined by the price ratio. (Fig.4.9).
Let's transform the budget constraint to represent it graphically:
.
Then the coordinates of the intersection of the budget constraint curve with the axes X and Y(the points of intersection with the axes show the amount of the corresponding goods that can be acquired if the entire budget is directed to the purchase of only this good) will have the following coordinates, respectively:
product Y
=
,
product X = 
.
Fig.4.9 Budget constraint
The budget constraint line can be more complex (broken, convex, etc.), which depends on the conditions that determine the consumer's ability to buy these goods. An example of such situations can be the rationing of a part of consumed products, the provision of certain benefits for free or on preferential terms.
Fig. 4.10 Change in prices for goods and budget constraint
The budget constraint change under the influence of two circumstances:
a) change in income. Other things being equal, the budget constraint curve shifts in parallel.
b) changes in the prices of goods. In this case, the real purchasing power of the available income changes, which is reflected in the change in the slope of the curve. The cheaper the good, the flatter the schedule of the budget constraint becomes, and vice versa (Figure 4.10).
4.4 Consumer equilibrium
It is assumed that each subject seeks to spend his entire budget in such a way as to achieve maximum welfare, and if he achieves this welfare, then we can talk about consumer equilibrium . This is an equilibrium in the sense that, under the given assumptions of the model, the consumer receives such a set of goods that brings him the greatest possible satisfaction when spending all his income and he has no reason to change it for another.
Graphically, the equilibrium of the consumer looks like the point of contact between the indifference curve and the budget constraint (Fig. 4.11). Any point on the chart that is above the budget constraint (point FROM), is unattainable for the subject, that is, he cannot acquire a given amount of goods with his income and prices for goods. Any point below the budget constraint (point BUT), indicates that the entity did not spend its entire budget. Dot AT, lying at the intersection of the budget constraint and the indifference curve, indicates the irrational use of money when buying goods, since the maximum possible satisfaction of needs is not achieved.
Rice. 4.11 Consumer equilibrium
Mathematically, the maximum satisfaction of the consumer's needs when buying and consuming several goods is described by the equality of the ratios of the marginal utility of goods to the prices of these goods (Gossen's second law).
.
The equilibrium of the consumer is achieved if the subject buys such a quantity of goods that the ratio of marginal utility to price will be the same for each purchased good and at the same time the subject spends his entire budget, that is, the condition is met:
,
.
The situation in which the buyer refuses to buy one product is called angular balance (4.12). It arises in those cases when, at the existing price level, the marginal utility of a unit of goods is less than the marginal cost of acquiring it, or one of the benefits is an anti-good for a given subject.
Rice. 4.12 Angular balance
If the budget constraint has the form of a broken line, then the subject reaches the maximum welfare at one of the break points (Fig. 4.13).
As we noted, the choice of the consumer is due to a number of restrictions:
a) tastes that rank products for the consumer;
b) the size of the budget that he has;
c) the level of prices of purchased goods.
That's why the consumer's equilibrium can change under the influence of three factors:
Rice. 4.13 Equilibrium under a broken curve of the budget constraint
1) changing consumer tastes . In this case, the nature of the indifference curve changes (the new one can cross the old curve), as a result of which the combination of purchased goods changes with the same income and prices for these goods (Figure 4.14). The subject feels satisfied to a greater extent (for example, a change in the ratio between the purchase of cigarettes and the services of fitness centers under the influence of a person's desire for healthy lifestyle life).
Rice. 4.14 Changing Tastes and Consumer Equilibrium
2) Change in income . If the income and purchasing power of the subject increase, then the budget constraint curve shifts upwards and this allows the subject to move to a new higher indifference curve, that is, he buys more goods. If we connect the equilibrium points, then we get income-consumption curve which shows how the consumption of various goods will change with the growth of the subject's income (Fig. 4.15).
Figure 4.15 Income-consumption curve
If both goods are normal, then an increase in income will lead to an increase in the consumption of both goods. If income growth leads to the fact that one of the goods for the subject becomes of poor quality, then the income-consumption curve will begin to slope towards a normal good.
Rice. 4.16 Engel curve
Based on the income-consumption curve, one can construct Engel curve
, which shows how much of a particular good is consumed with an increase in the income of the subject (Fig. 4.16) and Tornquist curves, showing the change in the structure of family budget expenditures with an increase in income. The slope of the Engel curve is given by the ratio 
, where 
income change.
Ernst Engel's research revealed the following patterns :
a) at given prices for all goods, the share of family income spent on food tends to decrease as income increases;
b) expenditures on services related to education, health care, and recreation are growing faster than income is growing.
These patterns are also confirmed by the materials of Russia and Belarus (Table 4.2): the higher the income, the lower the share of expenditures on food and the higher the share of expenditures on non-food products.
Table 4.2
The structure of household expenditures depending on the level of income
|
Households by 10 percent population |
Belarus | |||||||
|
Food |
alcoholic drinks |
non-grocery goods |
Payment for services |
Food |
alcoholic drinks |
non-grocery goods |
Payment for services |
|
|
first (with the least resources) | ||||||||
|
fourth | ||||||||
|
tenth (with the most resources) | ||||||||
3) Change in prices for goods and services leads to a change in the real purchasing power of available income. In this case, the slope of the budget constraint changes on the graph, which allows you to move to a new indifference curve, to achieve a higher satisfaction of your needs. If we connect the equilibrium points, we get the price-consumption curve, which is actually the demand curve for this product (Figure 4.17).
Figure 4.17 Effect of price changes on consumer equilibrium
For different types of interrelationships of goods in consumption, the price-consumption curve will have a different shape. If the goods are substitutes for each other in consumption (bus or trolley bus ride), then the price-consumption curve will have a negative slope. If the goods are complementary in consumption (bread and butter), then the price-consumption curve will have a positive slope. If two goods are independent of each other in consumption (clothes and furniture), then the price-consumption curve will be horizontal.
Demand function is the marginal utility of a good, determined in the process of consumer choice, expressed in monetary terms, corresponding to the optimal composition of the purchase. In the consumer choice model, individual consumer demand is influenced by:
consumer preferences;
The consumer's income spent on the purchase of the good
The price of this good;
The prices of goods that replace and supplement this good in consumption.
A change in the price of one good affects the consumption of other goods as well, as there is a substitution effect and an income effect. A decrease in the price of one good will lead to a reduction in the consumption of another good, since the subject believes that it is better to increase the consumption of a good that has become cheaper for him ( replacement effect ). income effect is that a decrease in the price of one good makes it possible to increase the purchase and consumption of not only this, but also another good as a result of an increase in the real income of the subject
In 1915, the Russian economist E. Slutsky considered the influence of the income effect and the substitution effect with respect to the product, the price of which is decreasing. In the 30s, the same idea was considered by D. Hicks and in economic theory, despite some differences in analysis, there is Slutsky-Hicks theorem .
A change in the price of the good X leads to an increase in the consumption of the good from X 0 to X 1 (Fig. 4.18). It is necessary to understand how much of the increase in consumption of good X is caused by the refusal to consume good Y (substitution effect) and how much is generated by an increase in the purchasing power of income (income effect).
Fig.4.18 Graphical interpretation of the Slutsky-Hicks theorem
To decompose the overall X 0 X 1 effect into a substitution effect and an income effect, assume that the consumer's real income has not changed despite price changes. This means that the subject remains on the same indifference curve, since customer satisfaction level does not change. Let's draw an imaginary budget line M ’ parallel to the budget line M 1 tangent to the indifference curve U 0 . It reflects the new ratio of prices for goods X and Y while maintaining the level of real income. Therefore, X 0 X ' is the increase in the volume of consumption of product X as a result of the effect of replacing the consumption of good Y by cheaper product X. Then X "X is the increase in consumption of product X as a result of an increase in consumer income resulting from the transition from the budget constraint M ' to the budget constraint limit M 1 at a constant price level.
Consideration of the income effect and the substitution effect showed that if the good is normal, then the effects of both income and substitution act in the same direction.
Fig. 4.19 Change in the volume of consumption of a low-quality good
If the product is of poor quality, then the income effect and the substitution effect act in different directions (Figure 4.19). This is due to the fact that a decrease in the price of a low-quality good causes an increase in the consumption of this good, but at the same time, the subject spends part of his income on the purchase of good Y, which is normal, and due to this, the purchase of a low-quality good decreases. But in general, the consumption of a low-quality good increases, since the substitution effect on absolute value outweighs the income effect.
Fig.4.20 Giffen goods
From low-quality goods allocate Giffen Goods, which is characterized by an increase in the consumption of a given good with an increase in its price. This means that the income effect works in the opposite direction and exceeds the substitution effect (Figure 4.20).
It is believed that Giffen goods should not only be low-quality goods for the subject, but also occupy a significant place in the budget of the subject (expenses on food for low-income families).
The exchange that the consumer makes brings him benefits. The buyer exchanges money for a certain commodity because he values the utility of this commodity higher than the utility of the money he gives for a given quantity of the commodity. The seller exchanges goods for money, because he believes that this amount of money is more useful to him than the amount of goods sold. Using this approach, we formulated Smith's theorem , according to which the exchange in the market brings benefits to both parties.
Consideration of consumer behavior has led to the emergence of the concept "consumer surplus" , which is understood as the benefit, satisfaction that the subject receives when purchasing this product “for free” (Fig. 4.21). The French scientist J. Dupuis was the first to introduce this concept into scientific circulation in 1844.
Fig.4.21 Consumer surplus
There is a consumer surplus because the total utility in acquiring a good exceeds the amount of money that the subject pays for a given quantity of goods. This is due to the fact that the buyer pays the same price for all units of the purchased good, and the price is equal to the marginal utility of the last unit of this good purchased, while the marginal utilities of the first purchased units of the good are higher than the price. The consumer's surplus is equal to the amount of money that the buyer will save if, instead of paying the same price for each unit of the good he buys, he pays in accordance with the marginal utility of each unit of the good. As a result of such a transaction, the total utility received by the subject from the consumption of the entire amount of the purchased good is greater than the amount of money paid for this good. Therefore, consumer surplus is estimated as the difference between the price a consumer is willing to pay for a good and the price he actually pays. On this occasion, A. Marshall noted: “The excess of the price that the consumer would be willing to pay rather than do without this item, in excess of the price that he actually pays, serves as an economic measure of his additional satisfaction. This surplus may be called the rent of the consumer."
Budget constraint - 1) different sets of goods that can be purchased with a given amount of income at average market prices; 2) in the theory of consumption - a point on the curve of the budget constraint of a particular person, lying simultaneously on the highest of the indifference curves, representing the point of maximizing utility; 3) financial restrictions on the spending of funds from the budget, expressed in the form of maximum allowable expenses. Financial constraints are due to the presence of a limited amount of money in the budget ("bag of money") of the state, region, enterprise, family. Most often, the term "budget constraint" is used in the theory of consumption and means that the monetary costs of an economic agent for all the goods he purchases cannot exceed his monetary income, i.e. go beyond the budget line, otherwise called the price line or the line of consumption possibilities.
The budget constraint line (budget line) is a straight line, the points of which show the sets of goods at which the available income is fully realized. With a positive marginal utility of goods, the consumer always chooses the set represented by one of the points of this line, otherwise a part of the money would remain unspent, with which one could buy additional goods, increasing one's well-being. The budget constraint line can be more complex: compound, broken, convex, depending on the conditions that determine the consumer's ability to buy this product. For example, a broken budget line occurs if the budget constraint includes such a condition as a constraint not only on monetary resources, but also on time. The consumer's indifference map shows his subjective attitude to a particular set of goods.
However, the ability of the consumer to satisfy his tastes and preferences, and therefore the demand that he makes in the market, depends on the income available to him and on the prices of the goods concerned.
Both of these factors together determine the area of consumer bundles acceptable to the consumer, or the budget area.
The consumer's budget constraint can be written as an inequality:
P1 P2 -- prices for the corresponding goods Q1 and Q2
R -- consumer income
If the consumer spends his entire income on goods Q1 Q2 then we get the equality:
Transforming this equality, we obtain Q2=Q equation of the budget line, which looks like:
Figure 4 - Budget line
The budget line shows the set of combinations of goods Q1 and Q2 that a consumer can purchase by spending all his money income. The slope of the budget line is determined by the ratio P1/P2.
In a multi-commodity economy and taking into account consumer savings, the budget line equation can be written in general form as follows:
P1Q1 + P2Q2 + ... + PnQn + savings = R
Changes in the budget area can be driven by two main factors: changes in income and changes in commodity prices.
An increase in money income from R1 to R2 at constant prices will allow the consumer to purchase more of one or the other good. The slope of the budget line will not change because prices remain the same, but the line itself will move up and to the right, parallel to itself. With a decrease in income, the line will shift lower and to the left.
Figure 6 - Shift of the budget line
A change in the price of one of the goods, with income unchanged and the price of the other good, will change the slope of the budget line, equal to the ratio of prices. So, for example, if the price P1 of good Q1 is reduced, the maximum amount of good purchased with a given income increases from R/P11 to R/P12. Accordingly, the slope of the budget line decreases.
Figure 7 - Changing the slope of the budget line
The following properties of the consumer's budget constraints also follow from the budget line equation: if prices P1, P2, and income R increase by n times, the position of the budget line does not change, and therefore, the area of budget constraints will remain the same. An increase in prices by n times is equivalent to a decrease in the consumer's income by the same number of times.
What bundle of goods will the consumer choose in order to obtain maximum satisfaction? The one that generates the maximum total utility, provided that the consumer's income allows him to do so. The choice of this product set means that the consumer has reached a position of equilibrium.
The consumer behavior model is based on the premise that buyers seek to obtain highest level utility by spending their income on goods and services available in the market. It is assumed that the consumer maximizes utility, given the available budget constraint. This implies that the consumer achieves as much net gain as possible from the exchange of income for goods and services during each period. However, the market bundles that the consumer is able to buy are limited, since he cannot spend more than his disposable income.
The purpose of a consumer behavior model is to explain how consumer choices affect preferences, income, and product prices. To solve this problem, using the model, conditions are established under which the consumer achieves the goal we have assumed. Bearing in mind the assumptions made about indifference curves and budget constraint.
The demand curve reflects the inverse relationship between the price and the quantity of a good that buyers are willing and able to purchase in a unit of time. In Fig.6. the demand curve is shown, in which the demand for apples is plotted along the horizontal axis, and the price for them is plotted along the vertical axis. From fig. Figure 6 shows that the higher the price of apples, the less quantity demanded. This relationship is called the law of the negative slope of the demand curve.
As price increases, quantity demanded decreases for two reasons. The first reason is the substitution (replacement) effect. When the price of a good rises, the buyer will try to replace it with a similar good. For example, if the price of butter rises, then the consumer will buy margarine. The second reason for the effect of reducing the quantity demanded when the price rises is the income effect. When the price of a good increases, the consumer begins to feel that he has become somewhat poorer than before. Thus, if the price of meat doubles, then the consumer will have less real income, resulting in a reduction in the consumption of meat and other goods.
Common sense and observation of reality is consistent with what the downward demand curve shows us.
Figure 8 - Demand curve for apples
Usually, people actually buy more of a given product at a low price than at a high one. It can be said that a high price discourages the consumer from making a purchase, and a low one, on the contrary, stimulates. The very fact that firms have "sales" is evidence of their belief in the law of demand. Businesses reduce stocks of goods by lowering prices rather than raising them.
In any given period of time, each purchaser of a product receives less satisfaction or benefit or benefit from each successive unit of the product. It follows that consumption is subject to the principle of diminishing marginal utility, that consumers buy additional units of a product only if the price of it decreases.
income effect. The law of demand can be explained on the basis of the concept of the substitution effect and the income effect due to price changes.
The income effect is the result of the impact of price changes on the real income of the consumer and, accordingly, on the amount of goods purchased. The income effect is determined by that part of the increase in the quantity demanded, which arose as a result of an increase in the real income of the consumer with a decrease in the price of a good. It reflects the impact of a decrease in the price of a good on the total demand of the buyer.
Let's show this with an example. Buying 4 units of good B at a price of 2 monetary units, consumer X spends 8 monetary units on the purchase. If the price decreases to 1 monetary unit, then he will buy these 4 units of the good already for 4 monetary units, and the remaining 4 monetary units will be released from him, which will allow the consumer to purchase an additional amount of this or other goods. The income effect in this example is 4 monetary units.
substitution effect. The effect of substitution (substitution) takes place in cases where a decrease in the price of separate item increases the demand for it by refusing to buy other goods that have become relatively more expensive for the buyer. The substitution effect is that part of the increase in the demand for a cheaper good, which was formed as a result of replacing other goods with this product.
Let us assume that the price of good B has decreased from 2 to 1 monetary unit. At a price of 2 units, consumer X bought 4 units of good B. Suppose that at new price and constant income, he is willing to purchase 6 units of the good. Benefit B became more attractive to him after the price reduction. He seeks to replace this good with other goods for which prices have not changed. A decrease in the price of good B in our example gave a substitution effect equal to 2 units of good B, since the buyer spends only part of the released money on additional purchase of favor B.
The substitution effect of a decrease in the price of a good will always be expressed in an increase in the quantity demanded for that good. Similarly, the income effect affects the change in demand: with an increase in real income as a result of a decrease in price, the volume of consumer demand increases.
This gives reason to conclude that the quantity demanded is inversely related to the price. This means that the demand curve has a negative slope. This conclusion explains most of the situations that arise in the market. However, consumer demand for some goods, labeled "low category goods", as opposed to "normal" goods, does not always correspond to this rule. Increasing the price of a “low category” product (which includes some essential goods) can cause a reaction from a low-income consumer that contradicts the law of demand. Thus, the rise in prices for milk and bread encourages pensioners to refuse to purchase other goods and increase the cost of purchasing these foodstuffs. This trend is explained by the fact that with an increase in the price of any essential product, it is difficult to find a substitute product with the same useful effect per unit of money spent on it. In this case, as prices rise, so does demand, i.e. the demand curve has a positive slope. The possibility of such a situation was first noted by the English scientist R. Giffen, who studied the volume of demand for potatoes in Ireland during the famine. Therefore, a good with a demand curve with a positive slope is called a Giffen good. Theoretically, this situation can be explained by the fact that in some situations the substitution effect and the income effect act in opposite directions. In the vast majority of cases, an increase in the price of a product leads to a decrease in demand, as the real income of the consumer decreases (the income effect operates). When the price of a good that satisfies one of the most urgent needs of the consumer, despite its increase, remains low relative to the prices of "normal" goods, it can be assumed that low-income consumers will be forced to replace other goods with a "low category" product. In this case, there will be a substitution effect. If the substitution effect exceeds the negative income effect, then the demand of the individual, contrary to the well-known pattern, will not decrease, but increase.
