The theory of demand

Consumer demand is the quantities of a particular good that an in­dividual consumer wants and is able to buy as the price varies, if all other factors influencing demand are constant.

That is consumer demand is the relationship between quantity de­manded for the good and its price. The factors assumed constant are prices of other goods, income, and a number of economic factors, such as social, physiological, demographic characteristics of the consumer in question. The theory of demand is based on the assumption that the consumer having budget constraint seeks to reach the maximum possible level of utility, that is, to maximize utility; but he usually prefers to obtain more rather than less. The consumer has to solve the problem of choice. Provided he is to maintain a given level of utility, increases in the quantity of one good must be followed by reductions in the quantity of the other good. The consumer has to choose the specific goods within the limits im­posed by his budget.

The concept of marginal utility is of great importance for solving the utility maximization problem. The marginal utility of a good is the additional utility obtained from consuming an additional unit of the good in question. The marginal utility from consuming a good decreases as more of that good is consumed. The income should be allocated among all possible choices so that the marginal utility per dollar of expenditure on each good is equal to the marginal utility per dollar of expenditure on every other good.

A price increase will result in a reduction in quality demanded. This relationship between quantity demanded of a good and its price is called the law of demand. As the marginal utility from each additional unit of the good consumed decreases, the consumer will want to buy more of this good only if its price is reduced.

Market demand is the quantities of a good that all consumers in a particular market want and are able to buy as price varies and as all other factors are assumed constant. A market demand depends not only on the factors affecting individual demands, but also on the number of consumers in the market. The law of demand also works with market demand.

Active vocabulary

assumption [q'sampS(q)n] n предположение

budget ['badZIt] n бюджет

constraint [kqn'streInt] n ограничение

utility [ju:'tIlItI] n полезность

marginal utility ['ma:dZInl ju:'tIlItI] предельная полезность

expenditure [Ik'spendItSq] n расхода, трата

to maximize ['m1ksImaIz] v максимизировать, максимально

увеличивать

to obtain [qb'teIn] v получать, приобретать

to maintain [meInteIn, mqn-] v поддерживать, сохранять

to result [rI'zalt] v кончаться, иметь результатом

to affect [q'fekt] v воздействовать

to follow ['fPlqV] v следовать

to vary ['ve(q)rI] v изменяться

Exercises

1. Read and translate the words without a dictionary.

Characteristics, constant, budget, social, factor, demographic, physiological, maximum, concept, problem, dollar.

2. Read the words and say what part of speech they belong to. Translate them into Russian.

Social, utility, possible, expenditure, assumption, marginal, maximize, individual, relationship, additional.

3. Find in the text the sentences with the modal verbs and their equivalents. Translate them into Russian.

4. Translate into Russian. Mind the modal verbs and their equivalents.

1. The consumer has to decide by how much the good A is preferred to the good B.

2. A great increase in the supply of money in the form of banknotes and bank credit is to result in inflation.

3. Not all partners in a firm must take an active part in management.

4. If prices change the consumer will have to change the quantities demanded if he is to maintain utility at the same level.

5. Having the aim to maximize profit, the producer should make a decision how to decrease inputs.

5. Form Participle I and Participle II from the following verbs.

Maximize, obtain, allocate, follow, maintain, reach, assume, have, give, choose.

6. Open the brackets. Choose Participle I or Participle II to complete the sentences.

1. Changes in prices of products (producing, produced) with the same resources will change the supply.

2. The economist is interested in factors (affecting affected) the allocation of resources for producing particular goods.

3. At constant prices, an increase in income leads to an (increasing, increased) budget.

4. Improvements in technology may be a factor (leading to, led to) changes in agricultural supply.

5. Market is an (organizing, organized) group of buyers and sellers of a particular good who are in contact with each other.

7. Match the beginning and the ending of the sentences.

Increase in the utility of one good can compensate Equilibrium price is the price at which The marginal utility of a good is the increase in There are different ways Over 60 percent of the capital of all US firms is in agro-industry Higher expenditure on foreign goods rather than on goods produced at home Rising incomes result in Per capita income in the United States

a. quantity demanded is equal to quantity supplied. b. to restrict import expenditure c. that is, industry based on agricultural products. d. an absolute fall of demand for inferior goods. e. is still higher than in Japan. f. the utility obtained by consuming one more unit of that good. g. the reduction of utility of another good. h. will increase demand for foreign good.

8. Answer the questions:

1. What is consumer demand?

2. What factors influencing consumer demand are assumed constant?

3. What is the principle assumption of the demand theory?

4. What choice does the consumer have to make?

5. What is marginal utility?

6. How does the marginal utility change as the consumption of a good

increases?

7. What is market demand?

8. In what way does market demand differ from individual demand?

9. Translate into English.

1. Каждый потребитель должен решить проблему выбора.

2. При равновесной цене предложение равно спросу.

3. Цены ниже равновесной приводят к дефициту.

4. На свободном рынке изменения цены зависят от изменения спроса и предложения.

5. Концепция предельной полезности очень важна для решения некоторых проблем спроса.

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