Customer Choice and Demands

It is not the province of economics to determine the value of life in “hedonic units” or any other units, but to work out, on the basis of the general principles of conduct and the fundamental facts of social situation, the laws which determine prices of commodities and the direction of the social economic process. It is therefore not quantities, not even intensities, of satisfaction with which we are concerned. . . .or any other absolute magnitude whatever, but the purely relative judgment of comparative significance of alternatives open to choice.
Frank Knight
 eople adjust to changes in some economic conditions with a reasonable degree of predictability. When department stores announce lower prices, customers will pour through the doors. The lower the prices go, the larger the crowd will be. When the price of gasoline goes up, drivers will make fewer and shorter trips. If the price stays up, drivers will buy smaller, more economical cars.  Even the Defense Department will reduce its planned purchases when prices rise.
Behavior that is not measured in dollars and cents is also predictable in some respects. Students who stray from the sidewalks to dirt paths on sunny days stick to concrete when the weather is damp. Professors who raise their course requirements and grading standards find their classes are shrinking in size. Small children shy away from doing things for which they have recently been punished. When lines for movie tickets become long, some people go elsewhere for entertainment.
On an intuitive level you find these examples reasonable. Going one step beyond intuition, the economist would say that such responses are the predictable consequences of rational behavior.  That is, people who desire to maximize their utility can be expected to respond in these ways. Their responses are governed by the law of demand, a concept we first introduced in Chapter 3 and now take up in greater detail.
Predicting Consumer Demand
The assumptions about rational behavior described early in the book provide a good general basis for explaining behavior. People will do those things whose expected benefits exceed their expected costs. They will avoid doing things for which the opposite is true. By themselves, however, such assumptions do not allow us to predict future

At the old prices, the original combination (two Cokes and two hot dogs) gave you a total utility of only 64 utils (45 from hot dogs and 19 from Coke). If you cut back to one Coke and three hot dogs now, your total utility will rise to 67 utils (57 from hot dogs and 10 from Coke). Your new utility-maximizing combination—the one that best satisfies your preferences—will therefore be one Coke and three hot dogs.  No other combination of Coke and hot dogs will give you greater satisfaction. (Try to find one.) 

To sum up, if the price of hot dogs goes down relative to the price of Coke, the rational person will buy more hot dogs. If the price of Coke rises relative to the price of hot dogs, the rational person will buy less Coke. This principle will hold true for any good or service and is commonly known as the law of demand.  The law of demand states the assumed inverse relationship between product price and quantity demanded, everything else held constant. If the relative price of a good falls, the individual will buy more of the good. If the relative price rises, the individual will buy 

Thus far we have discussed demand solely in terms of the individual’s behavior.  The concept is most useful, however, when applied to whole markets or segments of the population. Market demand is the summation of the quantities demanded by all consumers of a good or service at each and every price during some specified time period. To obtain the market demand for a product, we need to find some way of adding up the wants of the individuals who collectively make up the market. 

This is, of course, an extremely simple example, since only two individuals are involved. The market demand curves for much larger groups of people, however, are derived in essentially the same way. The demands of Fred, Marsha, Roberta, and others would be added to those of Anna and Betty. As more people demand more Coke, the market demand curve flattens out and extends further to the right. 

Elasticity: Consumers’ Responsiveness to Price Changes 

In the media and in general conversation, we often hear claims that a price change will have no effect on purchases. Someone may predict that an increase in the price of prescription drugs will not affect people’s use of them. The same remark is heard in connection with many other goods and services, from gasoline and public parks to medical services and salt. What people usually mean by such statements is that a price