Unit 2 Consumer Behaviour

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MMS
Unit 2: Consumer Behavior- I: Demand, types of demand, factors

affecting demand & demand function. Making of linear demand function
& linear demand curve. Law of demand. Consumer’s surplus
..
What is market?
We can divide individual economic units into two broad groups such as buyers
and sellers. Buyers include consumers who purchase goods and services, and
firms, which buy labour, capital and raw materials that they use to produce
goods and services.
Sellers include firms, which sell their goods and services; workers who sell
their labour, and resource owners who rent land or resources to firms.
A market is a group of buyers and sellers of a particular good or service. The

buyers as a group determine the demand for the product, and the sellers as a
group determine the supply of the product. Supply and demand are the forces
that make market economies work. They determine the quantity of each good
produced and the price at which it is sold.
What is demand?
Demand is not mere desire. When that desire is supported by or willingness is

supported by ability to pay then it is called demand. The quantity demanded of
any good is the amount of the good that buyers are willing and able to
purchase.
Many things determine the quantity demanded of any good but the most
important determinant is the price of the good. And what is the relationship
between quantity demanded and price? Inverse. The relationship between them
is called law of demand.
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Law of demand:
Other things being equal, the quantity demanded of a good falls when the price
of the good rises. The functional relationship between quantity demanded and
its price in the form of equation is:
D=f ( p)
Demand Schedule and Demand Curve:
Demand schedule shows the relationship between the price of a good and the
quantity demanded
Price Quantity demanded

1 50
2 40
3 30
4 20
5 10
Individual Demand Curve
Relationship between the quantity of a good that consumers are willing to buy
and the price of the good.
It slopes downward from left to right indicating demand and price of a

commodity are inversely related.
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From Individual to Market
Individual Demand – An Individual demand schedule represents the demand

for a good by a single individual. Market Demand- Market demand is the sum
of all the individuals demands in the market for any particular goods or service
at a particular price. Thus market demand is the summation of all individual
buyers quantity demanded at different prices.
Individual and Market Demand Schedule
Price A’s demand B’ demand Market demand

10 50 100 150
20 40 90 130
30 30 80 110
40 20 70 90
50 10 60 70
Market Demand Curve
Determinants of demand
• Price: If the price of ice cream increases, we buy less of it. On the other
hand, if it falls, we buy more of it. Hence we say that quantity demanded is
negatively related to price of a commodity. The relationship between quantity
demanded and price of a commodity is so pervasive that economists call it as
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law of demand. Other things remaining constant, demand for a commodity is

inversely related to price.
• Income: What would happen to demand for ice cream if you lost your job?
Most likely, it would fall. A lower income means you have less to spend on
total, so you would spend less on some. When demand for good falls when
income falls, the good is called as normal good.
• Prices of related goods: Suppose there are only two cell phones in the market:
Samsung and Sony. If price of Samsung falls then law of demand says that
more people will buy Samsung cell phone. At the same time, people will buy
less of Sony cell phone. When a fall in the price of one good reduces the
demand for another good then the two goods are called substitutes.
• Now suppose that the price of petrol falls, what would happen to demand for
car? The demand for car will rise. When a fall in price of one good raises the
demand for another good, the two goods are called complements
• Tastes: The most obvious determinant of demand is your tastes. If you like
ice cream, you buy more of it. Economists normally do not try to explain
people’s tastes because tastes are based on historical and psychological forces
that are beyond the scope of economics. Economists, however, examine what
happens when tastes change.
• Expectations: Our expectations about the future affect our demand for good
or service. For instance, if you expect that the price of gold would rise in
future, you buy gold today rather than tomorrow. So expectations about the
future price affect the demand for a commodity
Shifts in Demand Curve and movement along the demand curve
• Demand for a commodity not only depends on its price but also factors other
than price.
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• When factors other than price change then demand curve shifts to rightward
or leftward.
• When price alone changes then it causes movement along the demand curve.
( other factors remain constant)
Note that movement along the demand curve indicates change in quantity
demanded due to change in price of a commodity while a shift in demand curve
indicates that at a given price consumer demands more ( or less) of a
commodity due to change in factors other than price.
Variables that influence the buyers
Variables that affect quantity A change in this variable

demanded
Price Movement along the demand curve
Income Shits the demand curve
Prices of related goods Shits the demand curve
Expectations Shits the demand curve
Number of buyers Shits the demand curve
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Linear demand function and linear demand curve:
A function is in the form of an equation
Q D=a−bP
is called linear demand function. Here
Q D isquantity demanded ( dependent variable )
a is intercept .
b refers ¿ the slope of the curve that measuresthe rate of change ∈QD as a result of unit rate
of change in P .
For example
Q D=200−4 P
Now if the market price is Rs.40 then quantity demanded is 40 units. So let us
find out quantity demanded at various prices of a commodity.
Draw demand curve
Problem:
Assume that a linear demand function is

Q D=100−8 P
1. Calculate the quantity demanded for prices from 0 to Rs.10.

2. Draw the demand curve.
3. If the demand function changes to
Q D=100−8 P
Draw a new table and curve.
Consumer surplus
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Individual consumer surplus is the difference between the maximum amount

that a consumer is willing to pay for a good and the amount that the consumer
actually pays.
Suppose, for example, that a student would be willing to pay Rs. 500 for a
movie even though she actually pays Rs. 200.The Rs.300 difference is her
consumer surplus. When we add the consumer surpluses of all consumers who
buy a good, we obtain a measure of the aggregate consumer surplus
The difference between a buyer’s willingness to pay minus the amount the
buyer actually pays. The Willingness to Pay refers to the maximum amount
that a buyer will pay for a good. The willingness to pay measures how much
that buyer values the good.
Measurement of Consumer Surplus using the Demand Curve
Let us take following example. Let us assume that the price of bread is Rs.16.
When deciding how many breads to buy, our buyer might reason as follows.
The first bread cost him Rs. 16 but the consumer is willing to pay or he values
that bread worth of Rs. 20. This valuation is obtained by using the demand
curve to find the maximum amount the consumer will pay for each additional
bread. The first bread generates Rs 4 surplus value above the price. The second
bread is worth purchasing because it generates a surplus of Rs.3 and so on.
Consumer is indifferent in buying 5th unit of bread because it generates zero
surplus.
Price of Bread Buyer’s willingness to pay Consumer Surplus

Rs. 16 Rs.20 Rs.4
Rs.16 Rs.19 Rs.3
Rs.16 Rs.18 Rs.2
Rs.16 Rs.17 Rs.1
Rs.16 Rs.16 Rs.0
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--------- ----------- Total surplus=Rs.9.00
Using Demand curve to measure Consumer surplus
We can always measure consumer surplus by finding the area below the
demand curve and above the price line.
With the decrease in price of a commodity, consumer surplus increases because

existing consumers pay less and new consumers enters the market at lower
price.
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Unit 2: Consumer Behavior- I: Demand, types of demand, factors

A market is a group of buyers and sellers of a particular good or service. The

Demand is not mere desire. When that desire is supported by or willingness is

Demand Schedule and Demand Curve:

Price Quantity demanded

It slopes downward from left to right indicating demand and price of a

From Individual to Market

Individual Demand – An Individual demand schedule represents the demand

Individual and Market Demand Schedule

Price A’s demand B’ demand Market demand

law of demand. Other things remaining constant, demand for a commodity is

Shifts in Demand Curve and movement along the demand curve

Variables that influence the buyers

Variables that affect quantity A change in this variable

Linear demand function and linear demand curve:

A function is in the form of an equation

is called linear demand function. Here

Q D isquantity demanded ( dependent variable )

Draw demand curve

Assume that a linear demand function is

1. Calculate the quantity demanded for prices from 0 to Rs.10.

Draw a new table and curve.

Individual consumer surplus is the difference between the maximum amount

Measurement of Consumer Surplus using the Demand Curve

Price of Bread Buyer’s willingness to pay Consumer Surplus

--------- ----------- Total surplus=Rs.9.00

Using Demand curve to measure Consumer surplus

With the decrease in price of a commodity, consumer surplus increases because

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