CHAPTER: II

Theory of Consumer
Behavior
PART I
Theory of Demand and Supply
 What is Demand ?
The demand for commodity is consumers’ attitude and reaction
towards the commodity. In simple words, demand is desire for
goods and Services, backed by ability (E.C,F.C,M.C) and
willingness to pay.

A desire with resources but without willingness to spend is only a

potential demand.

A desire accompanied by ability to pay and willingness to pay makes

a real or effective demand.

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 Cont…

 Individual demand: Individual demand can be defined as the quantity

of a commodity that a person is willing to purchase at a given price over
a specified period of time, say per day, per week, per month etc.

 Market demand: Market demand refers to the total quantity that all
the users of a commodity are willing to buy at a given price over a
specified period of time.

 In fact, market demand is the sum total of individual demand

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 The law of Demand:
 Law of demand expresses the functional relationship between
price and quantity demanded. The law of demand is one of the
best known and most important laws of economic theory.

 The law of demand can be stated as, other things remaining the
same; there is inverse relationship between price and quantity
demanded.

 This law holds ceteris paribus assumption, that is, all other
things remain unchanged.
Dx = f(Px)……….(i)
Under ceteris paribus assumption
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 Demand schedule
Price per shirts (PS) Quantity demanded of
shirts (QS) "Millions"
$ 2.00 140

4.00 120

6.00 100

8.00 80

10.00 60

12.00 40

14.00 20
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 The Demand Curve

 The Demand Curve: By plotting the various price quantity

combinations given by the demand schedule on a graph, we obtain
the demand curve for the commodity

 In a simple term, a demand curve is a graphical presentation of

the demand schedule.

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Cont…

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 Market Demand Schedule
Market
Price ($.) No. of Sprite Bottles Demanded Demand(DM)
= (DA + DB + DC)
DA DB DC

$ 6.00 10 20 30 60

5.00 20 40 60 120
4.00 30 60 80 170
3.00 40 80 100 220
2.00 50 100 120 270
1.00 80 120 160 360

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Cont..

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 Shift in Demand Curve

 The demand curve would be shifted so that more or less of the commodity would be
demanded at any given prices due to following reasons
1. Consumers’ Income
2. The price of related commodity
Price of Complementary Goods
Price of Substitute goods
3. Consumers’ taste and preferences
4. Number of consumers in the market
5. Change in advertisement expenditure
6. Change in tax rate in the country
7. Change in fashion
8. Change in weather etc.

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Graphically

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 Movement along the demand

  Movement along the demand curve will occur when

the price of the good changes and the quantity demanded
changes in accordance to the original
demand relationship.

 In other words, a movement occurs when a change in

the quantity demanded is caused only by a change in
price, and vice versa

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 Demand Function

Demand function states the relationship between

demand for a product (the dependent variable) and its
determinants (the independent variables).

In mathematical language, a function is a symbolic

statement of relationship between a dependent and
independent variables.

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 Cont…
 Mathematically,
demand function can be stated as,
QDx = F( Px, Y, T, Ps, Pc, S, A……etc)……….(i)

Where,
Qx = Demand for X goods
F = Functional Relation
Px = Price of X goods
Y = Consumer’s Income
T = Consumers Taste
Ps = Price of substitute goods
Pc = Price of complementary goods
S = Sociological Factors
A = Advertisement Expenditure N. Ray
 Cont…

 For the sake of simplicity demand is normally expressed as the

function of price.
 Symbolically,
it can be expressed as,
Qx = f (Px)………………….(ii)

Where,
Qx = demand for x goods
F = functional relation
Px = Price of X goods

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 Cont…
 There are two most common forms of demand price relationship linear and non-
linear.

 Linear demand function: A demand function is said to be linear when the slope of
the demand curve remains constant throughout its length.

The simplest form of demand function is given as:

Dx = a - bpx................. (iii)
Dx = Demand of X good
a = Autonomus Demand
b = Slope of Demand Curve
Px = price of X good
Assume that a= 1000 and b= 5
Dx = 1000 – 5 Px ……………….(iv)

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 Non – linear demand function: The demand function is said to be non – linear
or curvilinear when the slope of a demand curve changes all along the demand
curve.

 Non – linear demand function yields a demand curve instead of demand line.
Non – linear demand function, generally takes the form of a power function as:
D x = a p x-
b…………………….(v)

Assume,
autonomous demand (a) = 450
Slope (b) = 0.25, 0.50, 2, 3 and 5
Find: Both linear and non-linear demand on different prices as Rs. 5, 10, 15,
20, 25 & 30

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linear demand curve:

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 Non-linear demand curve

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 Function with Numerical Question
Assume,
the demand function might be
Q = D (P, Ps, Pc, Y) ………………..(i)
Estimated demand function for pork in Canada
as Q = 171 – 20p + 20Pb + 3Pc + 2Y …………..(ii)
Q is the quantity demand for particular good at time period t; P is price of Pork in
Canada per k.g; Pb is the price of Beef (a substitute good); Pc is the price of Chicken ( another
substitute good); Y is the income of consumer in Dollars.
If, Pb= $4/kg. Pc= $3.33; and Y = $12.5 thousand; substituting the above value in
equation (ii), We get
Qd = 171 – 20P + 20Pb + 3Pc + 2Y
= 171 – 20P + 20 ($4) + 3 ($3.33) + 2 ($12.5)
= 286 – 20P = D(p)
Therefore, Qd = D(p) = 286 – 20P …………. (iii)
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Required:
1. Find out quantity demand from given equation (iii) with given prices
as $2.30, $3.30, $4.30, $5.30, ………….up to $14.30
2. Draw the diagram with above information

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 Determinants of demand
1. Price of X good
2. Consumer’s Income
3. Consumers’ Taste and Preferences
4. Price of substitute goods
5. Price of complementary goods
6. Sociological Factors
7. Advertisement Expenditure
8. Technological Progress
9. Government Policy
10. Non economic factors like:
10.1 Labor strikes (Communal riots)
10.2 Lock – outs (Epidemics) 23
 Supply Function
The quantity supplied is the amount of a good that
firms want to sell at a given price, holding constant other
factors

A supply curve shows the quantity supplied at each

possible price, holding constant the other factors that
influence firms’ supply decisions.
The curve shows there is positive relationship
between price and quantity supplied. Sx = F(Px)…(i)
Linear form; Sx = a + bpx…….(ii)

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Graphically,

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 Let the function as; Qsp = S ( Pp, Pm)…………….(i) ;
Where,
Qsp is the quantity supply for PORK; Pp is price of PORK
per k.g; Pm is price of mutton per k.g
The linear PORK supply function in Canada is
Qsp = 178 + 40p – 60Pm …….. (ii)
If per k.g price of mutton is about $1.5, then
Qsp = 88 + 40p ……... (iii)
dq/dp = 40 (deals differentiate quantity demand of pork
with respect to its price i.e slope b = 40)
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Required:
1. Find out quantity supplied from given equation (iii) with given
prices as $2.30, $3.30, $4.30, $5.30, ………….up to $14.30
2. Draw the diagram with above information

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 Market Equilibrium
Market Equilibrium: Equilibrium a situation in which
no participant wants to change its behavior, and both buyers
and sellers would like to buy or sell as much as they want at
given price.

A price at which consumers can buy as much as they

want and sellers can sell as much as they want is called an
equilibrium price.

The quantity that is bought and sold at the equilibrium

price is called the equilibrium quantity.

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Graphically,

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 Assignment II

1. What is demand function? Explain linear and

non linear demand with table and graph.
2. Why does Demand Curve Slopes Downward?
3. Explain market equilibrium graphically.

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