Consumer Behavior - e-CTLT

Report
Consumer Behavior
&
DEMAND
Ms S Chattopadhyay
PGT Economics
KV BallygungE
Content
• Consumer’s equilibrium
• Theory of Demand
• Price Elasticity of
Demand
Consumer’s equilibrium
Consumer’s equilibrium
• BASIC CONCEPTS
• Consumer’s Equilibrium Using Marginal
Utility Analysis
• Consumer’s Equilibrium by Indifference
Curve Approach
Basic concepts I
• Utility - Want satisfying power of a commodity .
• Total Utility - Total satisfaction obtained by a
consumer from consuming given amount of a
commodity .
• Marginal Utility -
Change in total utility
resulting from the change in consumption by one
unit. MUn = TUn – TUn-1 .
Basic concepts II
• Law of Diminishing MU – As we consume
more and more units of a commodity , the utility
derived from each successive unit goes on
diminishing.
• Assumption – LDMU is based on certain basic
assumptions like Rationality of the consumer,
Continuous consumption, Uniform quality of the
commodity consumed.
Basic concepts III
• Relation : TU & MU
Unit of consumption
TU
MU
01
20
20
02
36
16
03
46
10
04
50
04
05
50
00
06
44
06
When TU increases at a diminishing rate , MU falls. ( Upto 4th Unit )
When TU reaches its maximum & constant, MU = 0 ( At 5th Unit )
When TU falls, MU < 0 ( Above 5th Unit )
Consumer’s equilibrium by marginal
utility analysis
( Cardinal Approach )
• Consumer Equilibrium : Meaning
The situation when a consumer is having maximum
satisfaction with given income and has no tendency
to change his way of existing expenditure.
• Condition of consumer equilibrium – In
case of single commodity :
MUx in terms of money = Px ( x : commodity )
i.e MUx / MUm = PX ( MUm : MU of money )
• Consumer Equilibrium (in case of single commodity)
Unit of
X
Price of X
MU x
MUx / Mum
MUm = 1
Mux/MUm - Px
Remarks
1
10
20
20 / 1 = 20
20 – 10 = 10
MUx/MUm > Px
Increase in
consumption
2
10
16
16/1 = 16
16 – 10 = 6
3
10
10
10/1 = 10
10-10= 0
MUx/MUm = Px
4
5
10
10
4
0
4/1 = 4
0/1=0
4 – 10 = -6
0 – 10 = -10
MUx/MUm < Px
Consumer’s
Equilibrium
Decrease in
consumption
• Conditions of Consumer Equilibrium – In
case of Two commodities ( X & Y ) :
MU of last rupee spent on each commodity spent
is same i.e. MUX / PX = MUY / PY
Subject to Px . X + Py . Y = M
M : Money income.
• Consumer Equilibrium ( In case of Two comm)
Commodity X
Commodity Y
Unit X
MUx
Px
Mux /
Px
Unit Y
MUy
Py
MUy /
Py
1
100
10
10 
1
24
2
12
2
80
10
8
2
22
2
11
3
60
10
6
3
20
2
10 
4
40
10
4
4
18
2
9
5
20
10
2
5
16
2
8
6
0
10
0
6
14
2
7
1.
2.
3.
4.
* Money Income (M) of the consumer is Rs 30.
At X=1 & Y= 3, MUx / Px = MUy / Py but (Exp on X + Exp on Y ) ≠ M
At X= 2 & Y= 5 , MUx / Px = MUy / Py and (Exp on X + Exp on Y ) = M (Equilibrium )
If MUx/Px > MUy/Py , the consumer gets more MU from last rupee spent on X as
compared to Y. He will buy more of X and less of Y till MUx/Px = MUy/Py.
If MUx/Px < MUy/Py, the consumer gets more MU from the last rupee spent on Y as
compared to X. He will buy more of X and less of Y till MUx/Px = MUy/Py .
Consumer’s equilibrium by indifferenCe
Curve Approach
( Ordinal Approach )
• Indifference Curve : Meaning
A curve showing different combinations of two
goods which give equal satisfaction to the consumer.
• Indifference Map : Meaning
A family of indifference curves is called an
Indifference Map. Higher IC represents higher level
of satisfaction.
• Monotonic Preference : Meaning
• A consumer’s preferences are monotonic if and only
if between any two bundles, he prefers the bundle
which has more of at least one of the goods and no
less of the other good as compared in the other
bundle.
• Example : Consumer prefers bundle (2,3) to bundles
(2,2), (1,3) & (1,2).
• Monotonicity of preferences implies that a point
above IC represents a bundle which is preferred to
the bundle on IC
• Slope of Indifference Curve / Marginal Rate
of Substitution (MRSxy) 
(i) MRSxy – The amount of one good (Y) which a
consumer is willing to sacrifice for an additional unit
of the other good (X). The rate at which the consumer
trades off Y for X.
(ii) The slope measures the substitution ratio
between the two goods.
(iii) Slope of IC = Y / X = MRSxy
• Properties Of Indifference Curve 
(i) An IC slopes downward – If the consumer
wants to have more units of one good, he will have
to reduce the consumption of other good in order to
maintain the same level of satisfaction.
(ii) An IC is convex to the origin i.e. MRS is
Diminishing – The consumer is willing to give up
less and less unit of one good for an increment in the
other (MU of the other falls with increase in consumption).
(iii) Two ICs do not intersect each other.
(Explanation may be given with diagram)
• Budget Line 
• It shows all possible combinations of two goods that
a consumer can buy with given income & prices of
the commodities.
• Budget Line : Px . X + Py . Y = M ( M : total income)
• Slope of Budget Line = Px / Py
i.e. the consumer can substitute good X for Y at the
rate of Px/Py.
Qy
A (0, M/Py)
•
 Budget Line (AB)
B (M/Px, 0)
Qx
• Why is the slope of Budget Line represented
by Price Ratio 
•
•
•
•
•
•
A point on budget line indicates a bundle which
the consumer can purchase by spending his entire
income. So, if he wants to have one more unit of one
good ( say X) , he will have to give up some amount
of the other good (say Y).
Suppose price of good X is Rs 4 per unit (Px=4) & that
of good Y is Rs 2 per unit (Py= 2). So to get one extra
unit of X , he has to sacrifice 2 units of good Y.
Slope of Budget Line = Unit sacrificed / Unit gained
= 2/1
Price Ratio = Px / Py = 4 / 2 = 2/1
Thus, slope of Budget Line = Price ratio
• Shift in Budget Line 
• (i) Change in Income – when income rises consumer
can buy more of both the goods , the budget line
shifts rightward (parallel shift - slope remains same as no
change in price) & vice versa.
• (ii) Change in Price – ( change in slope)
•
Px falls / Px rises
Py falls / Py rises
•
Qy A
Qy A1
A
Py falls
Px falls
A2

 Qx
Py rises
Qx
B2
B
B1
B
• Conditions of ConsumerEquilibrium(IC)
(i) Slope of IC = Slope of Budget Line
i.e. MRSxy = Px / Py
(ii) Diminishing MRS
• Consumer Equilibrium with IC
• E : equilibrium point which shows the
combination at which
Slope of Budget Line = Slope of IC
i.e. Px / Py = MRSxy
• Consumer equilibrium with IC  (contd…)
(i) if MRSxy > Px/Py, to obtain one more unit of X, the
consumer is willing to sacrifice more unit of Y than
what the market requires i.e. he is willing to pay
more for X than the price prevailing in the market. As
a result, he buys more of X & MRS falls till it becomes
equal to the ratio of prices.
(ii) If MRSxy < Px/Py , to obtain one more unit of X ,
the consumer is willing to sacrifice lesser units of Y
i.e. he is willing to pay less for X than the price
prevailing in the market. As a result he buys less of X
& more of Y & MRS rises till it becomes equal to the
ratio of prices.
THEORY OF DEMAND
THEORY OF DEMAND
•
•
•
•
•
Basic Concepts
Determinants of Demand
Law of demand
Change in quantity demanded
Change in demand
Basic Concepts
• Demand  The quantity of a commodity the
consumer is willing to buy at a particular price during
a particular period of time.
• Demand Schedule  A tabular presentation of
various quantities of a good that consumers are
willing to buy at different prices  Individual &
Market Demand Schedule.
• Demand Curve  A graphical presentation of
various quantities of a good that consumers are
willing to buy at different prices  Individual &
Market Demand Curve.
Determinants of Demand I
• Price of the commodity – Inverse
relationship between price of the commodity & its
quantity demanded.
• Prices of Related commodities – Two cases
(i) Substitute Goods (eg. Tea& Coffee) – Direct
relation between price of a commodity & demand for
its substitute.
(ii) Complementary Goods (eg. Ink & Pen) – Inverse
relation between price of a commodity & demand for
its complementary good.
Determinants of Demand II
• Income of the consumer – (Two cases)
(i) Normal Good – Demand for the good increases with
increase in income of the consumer. Direct relation.
(ii) Inferior Good – Demand for the good decreases with
increase in income of the consumer. Inverse relation.
.
Taste & preferences of the consumer –
Favourable changes in taste & preferences of the
consumer increases demand for a commodity. Direct
relation.
.
Expectation of consumer about future change
in price of the commodity – Direct relation
.
Size of population – Direct relation.
Law of Demand
• Statement – Other factors remaining same the
demand for a good is inversely related to its price.
• Example – Px
10 20 30
Qx 35 25 15
• Diagram – Inverse relation is represented by
downward sloping demand curve.
Px
d
Qx
Change in Quantity Demanded
• Expansion of Demand – Other things remaining
same , demand for a commodity rises with fall in its
price . Represented by downward movement along
the demand curve. Eg. Px : 10 05 Qx : 15 20
• Contraction of Demand – Other things remaining
same , demand for a commodity falls with rise in its
price. Represented by upward movement along the
demand curve. Eg. Px : 05 10 Qx : 20 15
• Diagram : Represented by the movement along the
demand curve. Students should draw the diagram
Change In Demand
(i) Increase in demand 
. Meaning : When higher quantity of a commodity is
demanded at the same price due to change in other
determinants of demand.
. Example : Px 10 10
Qx 20 30
. Specific reasons : Change in determinants other
than the price of the commodity eg. Increase in
Income, Rise in price of substitute good, Fall in price
of complementary good, Favourable change in taste
& preference of the consumer etc.
. Diagram : Represented by rightward shift of
demand curve. (Students should draw the diagram.)
(ii) Decrease in demand 
. Meaning : When lower quantity of a
commodity is demanded at the same price due
to change in other determinants of demand.
. Example : Px 10 10
Qx 30 20
. Specific reasons : Change in determinants
other than the price of the commodity eg.
Decrease in Income, Fall in price of substitute
good, Rise in price of complementary good,
Unfavourable change in taste & preference of
the consumer etc.
. Diagram : Represented by leftward shift of
demand curve. Students should draw the
diagram.
Price Elasticity of demand
Price Elasticity of demand
• Meaning
• Measurement of Price Elasticity of
Demand - Total Expenditure Method,
Point Method & Percentage Method.
• Degrees of Elasticity of Demand
• Factors affecting Price Elasticity of
Demand.
Price Elasticity of Demand
• Meaning :
It is a measure of degree of responsiveness
of demand for a commodity to change in its
price.
Measurement of Price Elasticity of
Demand I
• Total Expenditure Method  Elasticity is
measured on the basis of nature of change in total
expenditure on the commodity due to change in its
price.
SL
If Price falls
1
Description
Ed
Term Used
Expenditure Increases Qty demanded rises in
greater proportion
Ed > 1
Elastic Demand
2
Expenditure remains
constant
Qty demanded rises in
the same proportion
Ed = 1
Unitary elastic
demand
3
Expenditure falls
Qty demanded rises in
a lesser proportion
Ed < 1
Inelastic Demand
Measurement of Price Elasticity of
Demand II
• Point Method 
• Elasticity of Demand = (Lower seg. / Upper seg.) of
demand curve
•
Price A (Ed = ∞)
E(Ed >1)
C (Ed = 1 : C - Mid-point)
D (Ed < 1)
B(Ed=0)
Qty
Measurement of Price Elasticity of
Demand III
• Percentage Method 
• Ed = ( % change in Qty demanded / % change in Price)
= ( change in Q / change in P ) X P/Q
•
The absolute value of the coefficient of elasticity of
demand ranges from Zero to Infinity.
Degrees of Elasticity of Demand
Ed
Type
of Ed
Description
Type of
Good
Shape of
Demand
Curve
Ed = 0
Perfectly
Inelastic
No change in Qty
demanded due to change
in price
Essentials of
life
Vertical St Line
0 < Ed < 1
Inelastic
% change in demand < %
change in price
Necessities
of life
Downward
sloping steeper
Ed = 1
Unitary
Elastic
% change in demand = %
change in price
Normal
goods
Rectangular
hyperbola
1 < Ed < ∞
Elastic
% change in demand > %
change in price
Luxuries
Downward
sloping flatter
Ed = ∞
Perfectly
Elastic
Infinite change in demand
without any change in
price
Imaginary
(under PC)
Horizontal
Factors affecting Price Elasticity of
Demand
• Availability of close substitutes in market
• Nature of commodity – necessary / luxury
• Income level of the consumers.
• Proportion of total expenditure spent on the
product.
• Time period needed to find substitute
THANKS

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