Transcript CONSUMER BEHAVIOUR

CONSUMER BEHAVIOUR
Theory
• Determinants of demand
• The Demand Curve
• Explanations of Demand
- utility
- indifference curve analysis
- revealed preference
- characteristics approach
Indifference Analysis
• Good A
All combinations of A and B
for which the consumer is
indifferent
AN INDIFFERENCE
CURVE
Good B
Indifference Analysis
• Good A
Slopes show relative
preferences for A and B
Good B
An A-lover
An Indifference Map
• Good A
The preferred direction if
A and B are both‘goods
Good B
The Optimal Combination of A
and B
• Good A
Budget
Line
Good B
If the Price of B Falls
• Good A
More B is bought and (in
this example only) the
same amount of A
Budget
Line
Good B
How to Find the Substitution and Income
Effects?
• Good A
More B is bought (and in
this example only) the
same amount of A
Budget
Line
Good B
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
Income Effect
• Good A
If relative prices don’t change
but real income rises
Good B
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
FACTORS INFLUENCING ELASTICITY
• Availability of substitutes
• Proportion of income spent on goods
• Durability of good
• Number of uses for goods
• Addictive goods
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
INCOME ELASTICITY OF DEMAND
• Measures responsiveness in demand to a change in income
• measurement usually positive and > 1 for luxuries and < 1
for necessities
• Normal, Inferior and Giffen goods
- price effects
- income and substitution effects
CROSS ELASTICITY OF DEMAND
• Measures responsiveness in demand of one product to a
change in the price of another
- substitutes
- complements
- independent goods
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