Overview – Theory of demand

When we dealt with the economic problem of scarcity, we indicated that an important question that needs to be answered relates to the issue of what to produce. We also argued that we require our economic system to be both technically and allocatively efficient. Allocative efficiency requires that we produce the right combination of goods and services.

In the topic dealing with demand, supply and prices, we argued that consumers express their preferences for goods and services through their demand for goods and services, and that the question of what to produce is answered in a market system through the forces of demand and supply. We also mentioned that a negative relationship exists between the price of a good or service and the quantity demanded.

In this section, we will use the utility approach to explain why the demand curve is downward sloping. In other words, we explain why consumers increase their quantity demanded when the price of a good or service decreases, and why when the price increases consumers decrease their quantity demanded.