The rational consumer allocates income among different goods so that the marginal utility gained from the last dollar spent on each good is the same. This rational spending rule gives rise to the law of demand, which states that people do less of what they want to do as the cost of doing it rises. Here, “cost” refers to the sum of all monetary and nonmonetary sacrifices-explicit and implicit-that must be made in order to engage in the activity.
The ability to substitute one good for another is an important factor behind the law of demand. Because virtually every good or service has at least some substitutes, economists prefer to speak in terms of wants rather than needs. We face choices, and describing our demands as needs is misleading because it suggests we have no options.
For normal goods, the income effect is a second important reason that demand curves slope downward. When the price of such a good falls, not only does it become more attractive relative to its substitutes, but the consumer also acquires more real purchasing power, and this, too, augments the quantity demanded.
The demand curve is a schedule that shows the amounts of a good people want to buy at various prices. Demand curves can be used to summarize the price-quantity relationship for a single individual, but more commonly we employ them to summarize that relationship for an entire market. At any quantity along a demand curve, the corresponding price represents the amount by which the consumer (or consumers) would benefit from having an additional unit of the product. For this reason, the demand curve is sometimes described as a summary of the benefit side of the market.
Consumer surplus is a quantitative measure of the amount by which buyers benefit as a result of their ability to purchase goods at the market price. It is the area between the demand curve and the market price.
