ABSTRACT
This chapter links individual utility-maximizing behavior to demand curves, showing how prices and incomes shape demand. Beginning with constrained optimization, we derive individual and market demand curves, and explain how relative prices, income, and preferences interact. We introduce core concepts of price elasticity of demand, cross-price elasticity, and income elasticity—tools essential for predicting how quantity demanded responds to economic changes. Using real-world examples (e.g., taxes on gasoline or soda), the chapter explores substitution and income effects, distinguishing between normal, inferior, and Giffen goods. We demonstrate how elasticities differ across time horizons, product types, and levels of aggregation. Applications include forecasting, policy evaluation, and competitive strategy. The chapter concludes with a detailed decomposition of demand responses, separating income and substitution effects to deepen understanding of consumer behavior.
