Managerial Economics and Strategy, 2/e

4.5 Deriving Demand Curves

We use consumer theory to show how much the quantity demanded of a good falls as its price rises. An individual chooses an optimal bundle of goods by picking the point on the highest indifference curve that touches the budget line. A change in a price causes the budget line to rotate, so that the consumer chooses a new optimal bundle. By varying one price and holding other prices and income constant, we determine how the quantity demanded changes as the price changes, which is the information we need to draw the demand curve.

We derive a demand curve using the information about tastes from indifference curves. To illustrate how to construct a demand curve, we estimated a set of indifference curves between recorded music—primarily ...