Passage Based Questions: Theory of Consumer Behaviour | Economics Class 11 - Commerce PDF Download

Passage - 1

Direction: Read the following Passage and Answer the Questions.

A consumer usually decides his demand for a commodity on the basis of utility (or satisfaction) that he derives from it. What is utility? Utility of a commodity is its want-satisfying capacity. The more the need of a commodity or the stronger the desire to have it, the greater is the utility derived from the commodity. Utility is subjective. Different individuals can get different levels of utility from the same commodity.

Q1: What is utility in the context of economics, and how is it defined?
Ans:

• Utility in economics refers to the satisfaction or want-satisfying capacity of a commodity. 
• It represents the benefit or satisfaction that an individual derives from consuming a particular item. 
• Utility is essentially the measure of how well a product or service fulfills a person's needs or desires.

Q2: How does the strength of desire or need for a commodity relate to its utility?
Ans:

• The utility of a commodity is directly related to the strength of an individual's desire or need for that commodity. 
• The greater the need or desire for a commodity, the higher the utility it provides. 
• In other words, the more essential or desirable a product is to someone, the more utility they obtain from it.

Q3: Why is utility considered subjective, and how does this subjectivity manifest in economics?
Ans:

• Utility is considered subjective because it varies from person to person. 
• Different individuals can derive different levels of utility from the same commodity due to their unique preferences, tastes, and individual needs. 
• This subjectivity is a fundamental concept in economics, and it underlines the importance of understanding consumer preferences and choices in the market.

Passage - 2

Direction: Read the following Passage and Answer the Questions.

The negative slope of the demand curve can also be explained in terms of the two effects namely, substitution effect and income effect that come into play when price of a commodity changes. When bananas become cheaper, the consumer maximises his utility by substituting bananas for mangoes in order to derive the same level of satisfaction of a price change, resulting in an increase in demand for bananas.Moreover, as price of bananas drops, consumer’s purchasing power increases, which further increases demand for bananas (and mangoes). This is the income effect of a price change, resulting in further increase in demand for bananas. Law of Demand: Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price. In other words, when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors remaining the same.

Q1: What are the two effects that explain the negative slope of the demand curve when the price of a commodity changes?
Ans:

• The two effects are the substitution effect and the income effect.

Q2: How does the substitution effect contribute to an increase in demand for bananas when their price decreases?
Ans:

• When the price of bananas drops, consumers substitute bananas for more expensive goods (e.g., mangoes) to maintain their satisfaction level, leading to an increase in demand for bananas.

Q3: What is the income effect, and how does it influence the demand for bananas when their price decreases?
Ans:

• The income effect occurs when a decrease in the price of bananas increases consumers' purchasing power. 
• This, in turn, results in a further increase in demand for bananas, as well as for other goods like mangoes.

Passage - 3

Direction: Read the following Passage and Answer the Questions.

The demand function is a relation between the consumer’s demand for a good and its price when other things are given. Instead of studying the relation between the demand for a good and its price, we can also study the relation between the consumer’s demand for the good and the income of the consumer. The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good. For most goods, the quantity that a consumer chooses, increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods.

Q1: What does the demand function describe, and what are its key variables?
Ans:

• The demand function describes the relationship between a consumer's demand for a good and its price when other factors remain constant. 
• The key variables in this relationship are the price of the good and the quantity demanded.

Q2: How is the concept of normal goods defined in relation to changes in consumer income?
Ans:

• Normal goods are defined as goods for which the quantity demanded by a consumer increases when the consumer's income rises and decreases when the consumer's income falls. 
• In other words, they exhibit a positive income elasticity of demand.

Q3: Can you explain the alternative approach to studying consumer demand mentioned in the passage?
Ans:

• Instead of studying the relationship between a good's price and demand, one can study the relationship between a consumer's demand for a good and the consumer's income. 
• This approach helps us understand how changes in income affect the quantity of a good consumers choose to buy, particularly for normal goods.

Passage - 4

Direction: Read the following Passage and Answer the Questions.

The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other. Goods which are consumed together are called complementary goods. Examples of goods which are complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. Similar is the case with other complements. In general, the demand for a good moves in the opposite direction of the price of its complementary goods.

Q1: What factors determine whether the quantity of a good a consumer chooses will increase or decrease with the rise in the price of a related good?
Ans:

• The nature of the relationship between the two goods, whether they are substitutes or complements, determines how changes in the price of a related good affect the quantity of the first good chosen by the consumer.

Q2: What are complementary goods, and can you provide examples of such goods mentioned in the passage?
Ans:

• Complementary goods are goods that are consumed together, and their consumption complements each other. 
• Examples include tea and sugar, shoes and socks, and pen and ink.

Q3: How does the price change of complementary goods impact the demand for the main good, and what is the general relationship between the price of complementary goods and the demand for the main good?
Ans:

• When the price of complementary goods increases, the demand for the main good typically decreases, and when the price of complementary goods decreases, the demand for the main good tends to increase. 
• In general, the demand for a good moves in the opposite direction of the price of its complementary goods.

Passage - 5

Direction: Read the following Passage and Answer the Questions.

The demand function is a relation between the amount of the good and its price when other things remain unchanged. The demand curve is a graphical representation of the demand function. At higher prices, the demand is less, and at lower prices, the demand is more. Thus, any change in the price leads to movements along the demand curve. On the other hand, changes in any of the other things lead to a shift in the demand curve.

Q1: What does the demand function represent, and how is it related to the demand curve?
Ans:

• The demand function represents the relationship between the quantity of a good and its price when other factors are held constant. 
• The demand curve is a graphical representation of this function, showing how the quantity demanded changes in response to price variations.

Q2: How do changes in price impact the demand curve, and what kind of movement occurs along the curve?
Ans:

• Changes in price result in movements along the demand curve. 
• When prices increase, the quantity demanded decreases, and when prices decrease, the quantity demanded increases, creating a movement along the curve.

Q3: What causes a shift in the demand curve, and what are the implications of changes in factors other than price on consumer demand?
Ans:

• Factors other than price, such as consumer income or preferences, lead to a shift in the demand curve. 
• Changes in these factors can increase or decrease the overall demand for a good, shifting the curve in the respective direction, indicating that consumers are willing to buy more or less of the good at any given price.

Passage - 6

Direction: Read the following Passage and Answer the Questions.

The demand for a good moves in the opposite direction of its price. But the impact of the price change is always not the same. Sometimes, the demand for a good changes considerably even for small price changes. On the other hand, there are some goods for which the demand is not affected much by price changes. Demands for some goods are very responsive to price changes while demands for certain others are not so responsive to price changes. Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price.

Q1: What does the direction of demand for a good in response to price changes depend on, and why is the impact not always the same?
Ans:

• The direction of demand for a good in response to price changes depends on whether the good is normal or inferior. 
• The impact of price changes varies because the demand for some goods is highly responsive to price changes, while others are less responsive.

Q2: How is price elasticity of demand defined, and what does it measure?
Ans:

• Price elasticity of demand is a measure that quantifies the responsiveness of the demand for a good to changes in its price. 
• It indicates how much the quantity demanded of a good will change in response to a change in its price.

Q3: What does it mean when a good has high price elasticity of demand, and what about goods with low price elasticity of demand?
Ans:

• A good with high price elasticity of demand experiences significant changes in demand with even small price changes. 
• In contrast, goods with low price elasticity of demand are not very responsive to price changes, meaning that changes in price have a relatively small impact on demand.

Passage - 7

Direction: Read the following Passage and Answer the Questions.

When the percentage change in quantity demanded equals the percentage change in its market price, eD is estimated to be equal to one and the demand for the good is said to be Unitary-elastic at that price. Note that the demand for certain goods may be elastic, unitary elastic and inelastic at different prices. In fact, in the next section, elasticity along a linear demand curve is estimated at different prices and shown to vary at each point on a downward sloping demand curve. 

Q1: What is meant by a good having unitary-elastic demand, and what condition must be met for eD to equal one?
Ans:

• Unitary-elastic demand occurs when the percentage change in quantity demanded equals the percentage change in the market price of a good. 
• eD, or price elasticity of demand, is equal to one when this condition is met.

Q2: Can a good have different elasticity values at various price points, and why does this occur?
Ans:

• Yes, a good can have different elasticity values at different price levels. 
• This variability in elasticity is due to the fact that the demand for certain goods may be elastic, unitary-elastic, or inelastic at various prices, depending on consumer preferences and market conditions.

Q3: What will be demonstrated in the next section regarding elasticity along a linear demand curve, and why does it vary at different points on such a curve?
Ans:

• The next section will illustrate that elasticity varies at each point on a downward-sloping demand curve. 
• This occurs because the slope and shape of the demand curve can result in different elasticity values as price and quantity change along the curve.

Passage - 8

Direction: Read the following Passage and Answer the Questions.

The price elasticity of demand for a good depends on the nature of the good and the availability of close substitutes of the good. Consider, for example, necessities like food. Such goods are essential for life and the demands for such goods do not change much in response to changes in their prices. Demand for food does not change much even if food prices go up. On the other hand, demand for luxuries can be very responsive to price changes. In general, demand for a necessity is likely to be price inelastic while demand for a luxury good is likely to be price elastic.

Q1: What factors influence the price elasticity of demand for a good?
Ans:

• The price elasticity of demand for a good depends on the nature of the good and the availability of close substitutes.

Q2: How does the demand for necessities, like food, typically respond to changes in their prices, and what is the likely elasticity in such cases?
Ans:

• The demand for necessities, such as food, is usually not very responsive to price changes. 
• In other words, it is likely to be price inelastic, meaning that even if food prices increase, the demand remains relatively stable.

Q3: What characterizes the demand for luxury goods in terms of responsiveness to price changes, and what is the expected price elasticity for luxury goods?
Ans:

• Demand for luxury goods is often highly responsive to price changes. 
• Luxury goods are likely to have price elastic demand, which means that small price changes can result in significant shifts in the quantity demanded as consumers have the option to reduce their consumption of luxuries when prices rise.

Passage - 9

Direction: Read the following Passage and Answer the Questions.

The expenditure on a good is equal to the demand for the good times its price. Often it is important to know how the expenditure on a good changes as a result of a price change. The price of a good and the demand for the good are inversely related to each other. Whether the expenditure on the good goes up or down as a result of an increase in its price depends on how responsive the demand for the good is to the price change.

Q1: How is the expenditure on a good calculated, and what does it depend on?
Ans:

• The expenditure on a good is calculated by multiplying the quantity demanded by the price of the good. It depends on both the price and the demand for the good.

Q2: What is the general relationship between the price of a good and its demand, and how does this relationship affect the expenditure on the good when the price changes?
Ans:

• The price of a good and its demand are inversely related, meaning that as the price increases, demand generally decreases and vice versa. 
• The direction of change in expenditure resulting from a price increase depends on the responsiveness of the demand for the good.

Q3: How does the elasticity of demand for a good influence changes in its expenditure when its price increases?
Ans:

• The expenditure on a good will increase when its price rises if the demand is price inelastic (inelastic demand) since the percentage decrease in quantity demanded is smaller than the percentage increase in price. 
• In contrast, for price elastic goods, the expenditure decreases with a price increase because the percentage decrease in quantity demanded is greater than the percentage increase in price.