CONSUMER BEHAVIOUR - PowerPoint by HC121002122717

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									                 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
 • Good A  and B




                        Good B
    Budget
    Line
     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
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
           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

								
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