A Presentation on

Consumer Behaviour
Applications of Consumer Behaviour in Construction of Price Indices –
Laspeyers and Paasche‘s indices
Price Index

 Definition: A price index is estimated as a series of summary measures of the

period-to-period proportional change in the prices of a fixed set of goods and
services of constant quantity and characteristics, acquired, used or paid for
by the reference population.
 Uses:
 It serves as an indicator of inflation in an economy.
 Can be used to change the components of national income.
 Laspeyres Price Index

 Laspeyres Price Index: The Laspeyres Price Index is a price index used to measure
the change in the prices of a basket of goods and services relative to a specified base
period weighting. Developed by German economist Etienne Laspeyres, the Laspeyres
Price Index is also called the base year quantity weighted method.
 Formula: If we consider two time period then the Laspeyres Price Index is
formulated as:

Where qb= base year quantity

pb= base year price
pc= current year price
 Paasche Price Index

 Paasches Price Index: The Paasche Price Index is a price index used to measure the
change in the price and quantity of a basket of goods and services relative to a base
year price and observation year quantity. Developed by German economist Hermann
Paasche, the Paasche Price Index is commonly referred to as the “current weighted
index.”
 Formula: If we consider two time period then the Paasche Price Index is
formulated as:
Where qc= current year quantity
pb= base year price
pc= current year price
 Laspeyres Quantity Index

 Definition: The Laspeyres Quantity Index is a quantity index used to measure the
change in the quantities of a basket of goods. Developed by German economist
Etienne Laspeyres, the Laspeyres Quantity Index is also called the base year price
weighted method.
 Formula: If we consider two time period then the Laspeyres Quantity Index is
formulated as:
Where qc= current year quantity
qb= base year quantity
pb= base year price
 Paasche Quantity Index

 Definition: The Paasche Quantity Index is a quantity index used to measure the change
in the price and quantity of a basket of goods and services relative to a base year
quantity and observation year price. Developed by German economist Hermann
Paasche, the Paasche Quantity Index is also called the base year price weighted
method.
 Formula: If we consider two time period then the Paasche Quantity
Index is formulated as:

Where qc= current year quantity

qb= base year quantity
pc= current year price
Relationship between Revealed
Preferences and Quantity Index
If the Paasche Quantity Index is less than 1 then:

That mean current year commodity bundle is more preffered than base year
commodity bundle.
Graphical Representation
Thank you