Class - Xi - Microeconomics - Consumer Behaviour and Demand

INDIAN SCHOOL MUSCAT

DEPARTMENT OF COMERCE AND HUMANITIES

CLASS – XI – ECONOMICS
PART-A: INTRODUCTORY MICRO ECONOMICS

UNIT 2: CONSUMER EQUILIBRIUM AND DEMAND
UTILITY: - The satisfaction which a consumer gets from using/consuming a good or service.
DIFFERENCE BETWEEN CARDINAL AND ORDINAL UTILITY ANALYSIS.

Cardinal Utility Ordinal Utility
Given by Prof. Alfred Marshall Given by Prof. J.R. Hicks
Utility can be measured numerically It cannot be measured numerically
Possible for a consumer to scale his
Unit of measurement is ‘utils’
preferences.
TOTAL UTILITY: - The total satisfaction a consumer gets from a given commodity /service.
OR
Sum of marginal utility is known as total utility
MARGINAL UTILITY: - An addition made to total utility by consuming an extra unit of commodity. Sum of
marginal utilities derived from various goods is known as total utility.
RELATIONSHIP BETWEEN MU AND TU:

i. When MU is positive TU rises.
ii. When MU is zero TU is maximum.
iii. When MU is negative, TU falls.
LAW OF DIMINISHING MARGINAL UTILITY: -

It states that as the consumer consumes more and more units of a commodity, the marginal utility derived from
each successive units goes on diminishing.
Demand for a commodity refers to the quantity of a commodity which a consumer is willing to buy at a given
price in a given period of time.
CONSUMER EQUILIBRIUM:
Refers to a situation when he spends his given income on purchase of a commodity (or commodities) in such a
way that yields him maximum satisfaction
CONDITION OF EQUILIBRIUM:
MU in terms of money = Price.
MU of product / MU of a Rupee= Price
CONSUMER EQUILIBRIUM THROUGH INDIFFERENCE CURVE

BUDGET SET: - Set of bundles (combination of goods) available to consumer
BUDGET LINE: - It refers to all combinations of goods which a consumer can buy with his entire income and
price of two goods.
EQUATION OF BUDGET LINE: - P1 X1 + P2 X2 = M
INDIFFERENCE CURVE: - The combination of two goods which gives consumer same level of satisfaction
PROPERTIES OF IC: -
1. It slopes downwards from left to right
2. It is always convex to the origin due to falling of Marginal Rate of Substitution (MRS)
3. Higher IC always gives higher satisfaction
4. Two IC never intersect each other.
INDIFFERENCE MAP: - Group of indifference curves that gives different levels of satisfaction to the
consumer.
MARGINAL RATE OF SUBSTITUTION (MRS):- It is the rate at which a consumer is willing to give up one
good to get another good.
CONSUMER EQUILIBRIUM: - At a point where budget line is tangent to the indifference curve, MRS = PX
/ PY,
i.e., Marginal rate of substitution = ratio of prices of two goods.
EXPLANATION OF THE DIAGRAM:

i) ‘AB’ is the budget line.
ii) It is sure that consumer’s equilibrium will lie on some point on ‘AB’
iii) Indifference map (set of IC1, IC2, IC3) shows consumers scale of preferences between different
combinations of good ‘X’ and good ‘Y’
iv) Consumers’ equilibrium will achieve where budget line (AB) is tangent to the IC2.
ESSENTIAL CONDITIONS FOR CONSUMERS EQUILIBRIUM:
i) Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py
ii) Indifference curve must be convex to the origin or MRSxy should decrease.
CONSUMERS CANNOT ACHIEVE THE FOLLOWING:

i) P and R points on budget line give satisfaction but they lie on lower indifference curve IC1. Choosing
point ‘q’ puts him on a higher IC which gives more satisfaction.
ii) He cannot move on IC3, as it is beyond his money income.
DEMAND
DEMAND: - Quantity of the commodity that a consumer is able and willing to purchase in a given period and at
a given price.
DEMAND SCHEDULE: - It is a tabular representation which shows the relationship between price of the
commodity and quantity purchased.
DEMAND CURVE: - It is a graphical representation of demand schedule.
INDIVIDUAL DEMAND: - Demand by an individual consumer.
MARKET DEMAND: It is the total demand of all consumers in the market taken together. It is the horizontal
summation of individual demand by all consumers taken together.
DETERMINANTS OF DEMAND: -
1. Price of the commodity itself: When the price of a commodity increases the demand for that
commodity decreases and vice versa.
2. Income of the consumer: When the income increases the demand for normal commodity also increases
and vice-versa.
3. Price of related goods:
In complementary goods demand rises with fall in price of complementary goods.
In substitute goods demand for a commodity falls with a fall in the price of other substitute goods
4. Taste and Preference: With favourable taste, demand increase and unfavourable taste demand
decreases for a commodity.
5. Other Factors: Situational factors that influence demand for a commodity. Example: weather conditions,
age, size, composition of population, etc.
DEMAND FUNCTION: - Dx = f(Px, Y, Pr, T)
SUBSTITUTE GOODS: - Increase in the price of one good causes increase in demand for other good. E.g., tea
and Coffee
COMPLEMENTARY GOODS: - Increase in the price of one good causes decrease in demand for other good.
E.g.: - Petrol and Car
NORMAL GOOD: - Goods which are having positive relation with income. It means when income rises, demand
for normal goods also rises.
INFERIOR GOODS: - Goods which are having negative relation with income. It means less demand at higher
income and vice versa.
LAW OF DEMAND: - Other things remains constant, demand of a good falls with rise in price and demand for
a good rise with fall in its own price.
DEMAND SCHEDULE
PRICE (₹) DEMAND (Units)
1 100
2 80
3 60
4 40
5 20
CHANGES IN DEMAND
They are of two types:
1) Change in Quantity Demanded (Movement along the same demand curve)
2) Change in Demand (Shifts in demand)
CHANGE IN QUANTITY DEMANDED: - Demand changes due to change in price of the commodity alone,
other factors remain constant; are of two types;
1. Expansion of demand: More demand at a lower price
2. Contraction of demand: Less demand at a higher price
CHANGE IN DEMAND
Demand changes due to change in factors other than price of the commodity, are of two types:
A) Increase in demand: - more demand due to change in other factors, price remaining constant.
B) Decrease in demand: - less demand due to change in other factors, price remaining constant.
DISTINCTION BETWEEN CHANGE IN QUANTITY DEMANDED AND CHANGE IN DEMAND
Change in Quantity demanded Change in demand
More units of a commodity are demanded due to More or less units of a commodity are demanded
decrease in price of the commodity. at the same price
Less units of a commodity are demanded due to
increase in price of the commodity
Movement along the same demand curve in upwards Shifts to a new demand curve right or left to the
or a downward direction original one.
Upward movement is the case of contraction of Rightward shift is the case of increase in demand
demand Leftward shift is the case of decrease in demand
Downward movement is the case of expansion of
demand
CAUSES OF INCREASE IN DEMAND
1. Increase in Income.
2. Increase/ favourable change in taste and preference.
3. Rise in price of substitute good.
4. Fall in price of complementary good.
Note: Increase in income causes increase in demand for normal good
CAUSES OF DECREASE IN DEMAND:

1. Decrease in Income.
2. Unfavourable/Decrease in taste and preference
3. Decrease in price of substitute good.
4. Rise in price of complementary good.
Note: Decrease in income causes Decrease in demand for normal good
PRICE ELASTICITY OF DEMAND (Ep):

Refers to the degree of responsiveness of percentage change in quantity demanded to a percentage change in its
price.
𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝𝐞𝐝
𝐄𝐩 =
𝐏𝐞𝐫𝐜𝐞𝐧𝐚𝐭𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐨𝐰𝐧 𝐩𝐫𝐢𝐜𝐞
P ∆Q
Ed = Q X ∆P P = Original price Q = Original quantity Δ = Change
FIVE DEGREES OF ELASTICITY OF DEMAND

1. Perfectly inelastic demand: - Even with change in price, there is no change in the quantity demanded, the
demand is said to be perfectly inelastic Ed =0. The demand curve is parallel to OY axis.
2. Perfectly elastic demand: - Even with no change in price there is a great change in qty. demanded, then the
demand is said to be perfectly elastic. The demand curve is parallel to OX axis
3. Unitary elastic demand: With a unit increase or decrease in price, there is unit increase or decrease in quantity
demanded. The demand curve resembles a rectangular hyperbola.
4. Relatively less elastic: With a unit increase in price, the quantity demanded is proportionately less, then
demand is said to be less elastic
5. Relatively more elastic: With a unit increase in the price, there is proportionately more increase in the quantity
demanded. The demand is said to be more elastic.
METHODS OF MEASURING PRICE ELASTICITY OF DEMAND
PROPORTIONATE / PERCENTAGE METHOD:

% 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝𝐞𝐝
𝐄𝐝 =
% 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞
OR
P ∆Q
Ed = X
Q ∆P
Example: The Price of ice cream is ₹20 per cup and demand is for 200 cup. If the price of ice cream falls
to ₹15 demand increases to 300 cups. Calculate elasticity of demand.
Solution:
P = 20; P1 = 15; ∆P = 5 Q= 200; Q1 = 300; ∆Q = 100
P ∆Q 20 100
Ed = Q X ∆P Ed = 200 X 5 Ed = 2
TOTAL OUTLAY METHOD (EXPENDITURE METHOD)

If with the fall in price, total outlay increases elasticity of demand is greater than one, if total outlay remains
constant, elasticity is equal to one and if the total outlay decreases elasticity is less than one.
Price of Total
Quantity Effect on Total Elasticity of
Situation Commodity Expenditure
(Kg) Expenditures Demand
(₹) (₹)
2 4 8 SAME TOTAL
A Ed=1
1 8 8 EXPENDITURE
TOTAL
2 4 8
B EXPENDITURE Ed>1
1 10 10
RISES
TOTAL
2 3 6
C EXPENDITURE Ed<1
1 4 4
FALLS
FACTORS THAT AFFECT ELASTICITY OF DEMAND.

1. Availability of close substitutes: If close substitutes of product are available, the commodity tends
to be more elastic, if there are not available; they tend to be less elastic.
2. Proportion of total expenditure spent on the product: If the amount spent on a product constitutes
a very small fraction of the total expenditure, then the demand tends to be less elastic of the amount
spent is high the elasticity of demand tends to be high.
3. Habits: A commodity if it forms an essential part of the individual, the demand tends to be inelastic.
It is consumed casually; the demand tends to be elastic
4. Time Period: Longer the time period, the more elastic is the demand for any product the shorter the
time period, less elastic is the demand for any products.

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INDIAN SCHOOL MUSCAT

DEPARTMENT OF COMERCE AND HUMANITIES

PART-A: INTRODUCTORY MICRO ECONOMICS

UNIT 2: CONSUMER EQUILIBRIUM AND DEMAND

DIFFERENCE BETWEEN CARDINAL AND ORDINAL UTILITY ANALYSIS.

RELATIONSHIP BETWEEN MU AND TU:

LAW OF DIMINISHING MARGINAL UTILITY: -

CONSUMER EQUILIBRIUM THROUGH INDIFFERENCE CURVE

EQUATION OF BUDGET LINE: - P1 X1 + P2 X2 = M

EXPLANATION OF THE DIAGRAM:

CONSUMERS CANNOT ACHIEVE THE FOLLOWING:

DEMAND CURVE: - It is a graphical representation of demand schedule.

INDIVIDUAL DEMAND: - Demand by an individual consumer.

DEMAND FUNCTION: - Dx = f(Px, Y, Pr, T)

CAUSES OF DECREASE IN DEMAND:

PRICE ELASTICITY OF DEMAND (Ep):

FIVE DEGREES OF ELASTICITY OF DEMAND

PROPORTIONATE / PERCENTAGE METHOD:

TOTAL OUTLAY METHOD (EXPENDITURE METHOD)

FACTORS THAT AFFECT ELASTICITY OF DEMAND.

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