CONSUMER BEHAVIOUR

1
CONSUMER BEHAVIOUR

• Theory  
• Determinants of demand
• The Demand Curve
• Explanations of Demand
•     - utility    - indifference curve
  analysis    - revealed preference    -
  characteristics approach

2
Indifference Analysis

• Good A

All combinations of A and B for which the
consumer is indifferent AN INDIFFERENCE CURVE
Good B
3
Indifference Analysis

• Good A

Slopes show relative preferences for A and B
Good B
An A-lover
4
An Indifference Map

• Good A

The preferred direction if A and B are bothgoods
Good B
5
The Optimal Combination of A and B

• Good A

Good B
Budget Line
6
If the Price of B Falls

• Good A

More B is bought and (in this example only) the
same amount of A
Good B
Budget Line
7
How to Find the Substitution and Income Effects?

• Good A

More B is bought (and in this example only) the
same amount of A
Good B
Budget Line
8
Substitution Effect

• Good A

If the consumer was on the same I-curve as before
(same real income) but prices moved to their new
level, (budget line has the new slope) more B
must be bought
Good B
9
Income Effect

• Good A

If relative prices dont change but real income
rises
Good B
10
DEMAND AND ELASTICITY

• Price Elasticity of Demand
• - Measures responsiveness in demand to a change
  in price
• - Elastic and inelastic demand
• - Arc and point measurements
• Some important applications of elasticity   
•  
• - tax revenue decisions- state company price
  increases- exports and imports

11
FACTORS INFLUENCING ELASTICITY

• Availability of substitutes
• Proportion of income spent on goods
• Durability of good
• Number of uses for goods
• Addictive goods

12
DIFFICULTIES IN MEASURING ELASTICITY

• Influence of other factors affecting demand
• Time period involved
• Changes
•     - between different places     - over time
• Lack of precise information
• Ambiguities in measurement

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INCOME ELASTICITY OF DEMAND

• Measures responsiveness in demand to a change in
  income
• measurement usually positive and gt 1 for luxuries
  and lt 1 for necessities
• Normal, Inferior and Giffen goods
•     - price effects- income and substitution
  effects  

14
CROSS ELASTICITY OF DEMAND

• Measures responsiveness in demand of one product
  to a change in the price of another
•     - substitutes  - complements   -
  independent goods

15
PRICE ELASTICITY OF SUPPLY

• Measures responsiveness of a change in supply to
  a change in price
•     - immediate market period- short run -
  long run  - very long run