Principles of Economics/Demand

Demand

(Review material from the indifference curve section if this seems unfamiliar.)

From the indifference curves we can see that people value things differently and alter what they demand (no pun intended) to best utilize their money. This naturally leads to the demand curve, which in many ways is similar to the sum of many individuals' indifference curves (but not entirely). The curve is often shaped similarly. The blue line in this graph is the basic demand curve. Note that the y axis is P, not Q2.

Quantity demanded

The quantity demanded is a specific quantity, given a demand curve and a price level. In this graph the price level of the market for the good, P*, has been extended to the y axis, price. At any quantity and given any demand curve, there should be only one natural equilibrium quantity demanded. This point is marked Q*. No trade occurs beyond this point.

Consumer surplus

Consumer surplus is a measure of the benefit or welfare to the consumers of trading with a particular good. It can be defined as the amount of money that they save from making the transaction, or the amount that they are willing to pay to buy the good under discussion. Different consumers have different preferences (indifference curves) and thus obtain different levels of happiness with the trade. In graphs, they are always arranged so that the most happy consumer - the one willing to pay the highest price - is placed rightmost, while the least happy consumer - the one barely willing to make the trade - is placed leftmost (at the equilibrium point).

In the graph, it is the area under the demand curve and above the price level, to the left of the equilibrium point, and is shaded blue. (To the left because no trade happens beyond the equilibrium.) At the equilibrium point the consumer is barely happy with the price offered and so there is no consumer surplus.