Short Notes: Theory of Consumer Behaviour | Economics Class 11 - Commerce PDF Download

What is Demand?

• Demand refers to the quantity of a commodity a consumer is willing and able to buy at a given price, considering personal tastes and preferences, with other factors constant.
• Changes in the commodity’s price directly affect the quantity demanded: higher prices reduce demand, lower prices increase it.

Demand Curve and Law of Demand

• Demand Function: Mathematical representation of the relationship between quantity demanded (X) and price (P), denoted as X = f(P), assuming other factors (e.g., income, preferences) are constant.
• Demand Curve: Graphical representation of the demand function, with price on the vertical axis and quantity on the horizontal axis.

• Law of Demand: States an inverse relationship between price and quantity demanded; as price increases, quantity demanded decreases, and vice versa, all else equal.
• The demand curve slopes downward due to this inverse relationship.

Other Factors Affecting Demand

• Besides price, demand is influenced by:
  1. Prices of related goods: Substitutes (e.g., tea/coffee) and complements (e.g., tea/sugar).
  2. Consumer income: Affects purchasing power.
  3. Tastes and preferences: Shifts demand based on consumer favorability.

​Let's understand the effect of these factors on the demand curve:

• Substitutes: If a substitute’s price rises, demand for the original good increases (rightward shift); if it falls, demand decreases (leftward shift).
• Complements: If a complement’s price rises, demand for the original good decreases (leftward shift); if it falls, demand increases (rightward shift).
• Preferences: Favourable changes shift demand right; unfavourable changes shift left.

Functions and Demand

• Function: A relationship where each value of the independent variable (x) has a unique dependent variable (y), denoted y = f(x).

• In demand: Quantity demanded (X) is a function of price (P), X = f(P).
• Increasing Function: y increases as x increases (e.g., y = 5 + x).
• Decreasing Function: y decreases as x increases (e.g., y = 50 - x), like the demand function.
• Graphical Representation: Demand curve is downward sloping, reflecting the negative relationship between price (vertical axis) and quantity (horizontal axis).

Deriving a Demand Curve

Derived from indifference curves and budget constraints, e.g., for bananas and mangoes with income M and prices P1 (bananas) and P2 (mangoes).

• Initial equilibrium at price P1 yields quantity X1 (bananas).
• Price drop to P2 expands budget, increasing banana consumption to X2.
• Further drop to P3 increases consumption to X3.
• Plotting P1/X1, P2/X2, P3/X3 forms the demand curve.

• Substitution Effect: Lower price makes bananas cheaper relative to mangoes, increasing banana demand.
• Income Effect: Price drop increases purchasing power, boosting demand for bananas.

Linear Demand

• a = intercept (demand at price 0).
• -b = slope (change in demand per unit price increase).

If price rises by 1 unit, demand falls by b units; at price a/b, demand is 0.

Normal and Inferior Goods

• Normal Goods: Demand increases with income and decreases with income reduction (e.g., most goods).
• Inferior Goods: Demand decreases with income increase and increases with income reduction (e.g., low-quality cereals).
• Giffen Goods: Rare inferior goods where demand rises with price due to a dominant income effect (e.g., staple foods during price hikes), violating the Law of Demand.
• For inferior/Giffen goods, substitution and income effects oppose each other, determining demand direction.

Substitutes and Complements

• Complementary Goods: Consumed together (e.g., tea/sugar); price increase in one reduces demand for the other.
• Substitute Goods: Replace each other (e.g., tea/coffee); price increase in one increases demand for the other.

Shifts in the Demand Curve

• Movements Along the Curve: Caused by price changes of the good, reflecting the Law of Demand.
• Shifts of the Curve: Caused by changes in non-price factors:
  1. Income: Normal goods shift right with income increase; inferior goods shift left.
  2. Related Goods: Substitute price increase shifts demand right; complement price increase shifts left.
  3. Preferences: Favourable changes shift right; unfavourable changes shift left.
• Example: Higher Coca-Cola prices shift Pepsi’s demand curve right; higher milk prices shift cereal’s demand curve left.

Market Demand

• Definition: Total demand for a good at a specific price from all consumers in the market.
• Derivation: Sum of individual demand curves (horizontal summation).

• Example: For two consumers with demands q1’ and q2’ at price p’, market demand is q1’ + q2’.
• Linear Demand Example: Individual demands d1(p) = 10 - p and d2(p) = 15 - p yield market demand:
  25 - 2p for p ≤ 10.
  15 - p for 10 < p ≤ 15.
  0 for p > 15.