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The demand curve
Suppose that starting from a condition of equilibrium, the price of X falls relative to Y. We now have a condition where the utility from the last shilling spent on X will be greater than the utility from the last shillings spent on Y. Mathematically this can be written as:
In order to restore the equilibrium the consumer will buy more of X (and less of Y), thus reducing the marginal utility of X. The consumer will continue substituting X for Y until equilibrium is achieved. Thus we have attained the normal demand relationship that, ceteris paribus, as the price of X falls, more of it is bought. We have therefore a normal downward-sloping demand curve. The demand curve we have derived is the individuals' demand curve for a product. The market demand curve can be then obtained by aggregating all the individual demand curves.
The explanation we have obtained here is of the price (or substitution) effect.
The following represents the section headers you should consider for your reasoned document. Each section should have (at least) two research citations to support your work :
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Assignment
a) What do you understand by equilibrium National Income and to what extent is economic growth beneficial to an economy? b) Explain using both diagrams and mathematical tools,
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