In this chapter, we used the consumer choice model of Chapter 4 to see where demand curves come from and what factors shift them. We studied how changes in various factors that drive consumer demand for a good—their income, the good’s price, and the prices of other goods—affect the consumer’s utility-maximizing bundle and, through this, the demand curve.

We decomposed the response of a consumer’s choices to a price change in a good into two components: the substitution effect and the income effect. The substitution effect reflects changes in quantities consumed due to the new relative prices of goods after the price change. The income effect reflects the fact that a price change affects a consumer’s buying power, and this, in turn, changes the consumer’s optimal consumption bundle.

We also saw how individuals’ demand curves for a good are added up to create the market demand curve for that good.

This chapter ends our examination of the factors that determine consumer demand. In the next chapter, we move on to producer behavior and the supply side of markets.

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