Microeconomics Analysis

LESSON # 17
Consumer Demand (Part 01)
Microeconomics Analysis

Module # 66
Microeconomics Analysis

Consumer Behaviour:
Consumer Demand
Consumer Behaviour

Consumer Demand

i. Willingness and ability of

consumers
ii. To purchase a quantity of goods
and services
iii. In a given period of time, or at a
given point in time.
Consumer Behaviour

Consumer Demand
• Merely being willing to make a
purchase does not constitute
effective demand
• Desire needs purchasing power
to turn it into effective demand
 Consumer Behaviour

Price of
compliments
Needs

Income

Price Demand Non Price

Prefernce

Expectation

Price of Habits
Subtitutes
.
Consumer Behaviour

 Different preferences will lead to

different demand functions.
 Demand function will be different for
different type of commodities
 For different set of prices and income,
there will be a different combination
of goods that is the optimal choice of
the consumer
 Demand functions depends on both
prices and income:
DX1 = ƒ(P1, P2,m) &
DX2 = ƒ (P1, P2,m)

.
 The CDF is the function relating to the
optimal choice
 Consumer Behaviour
Consumer Demand function
1

The optimal choice of goods 1 and 2 at some set of prices and income is called the
consumer’s demanded bundle. i.e (X*1, X*2 ).

When income change, the consumer’s optimal choice will change.

When prices change, the consumer’s optimal choice will change.

.
 Consumer Behaviour
Consumer Demand Function
(goods are Perfect Substitutes)
• We have three possible cases.
Case 1 (if P2 >P1 ) Case 02 (if P1> P2 ) Case 03 (if P1 = P2)

• The slope of the budget

• The slope of the budget • There is a whole range
line is flatter than the
line is steeper than the of optimal choices—any
slope of the
slope of the indifference amount of goods 1 and
indifference curves
curves 2 that satisfies the
• The consumer spends
• The consumer spends budget constraint is
all of his or her money
all of his or her money optimal in this case.
on good 1.
on good 1.

.
 Consumer Behaviour

If P1< P 2
If P1> P 2 2or

if P1= P 2
Consumer Behaviour

Consumer Demand function

(Goods are Perfect Complements)
The optimal choice will always lie on the
1
diagonal/vertex, where the consumer is
purchasing fixed proportion of both goods.

2 Demand will not be affected by change in

single commodity price, if change will
happen it will in combination

This consumer is purchasing the same

3 amount of good 1 and good 2, no matter
what the prices.
Consumer Behaviour

Satisfying the budget

constraint

Solving for x gives optimal

choices of both
Microeconomics Analysis

Module # 67
Microeconomics Analysis

Consumer Behaviour:
Normal and Inferior Goods
Consumer Behaviour
Consumer Choices
- Normal Goods
 Factors affecting consumer
demand?
 How a consumer’s demand for a
good changes as his income
changes?
 How the optimal choice at one
income compares to the optimal
choice at another level of
income?
 Consumer Behaviour
Keeping prices Constant
c hange∈ quantity demanded
=𝐼 𝑛𝑐𝑜𝑚𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑
change ∈income (m)

percentagechange∈quantity demanded(𝑋 1, 𝑋 2)¿ ¿ =𝐼𝑛𝑐𝑜𝑚𝑒𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑

percentagechange∈income(m)
keeping Consumer goods and services are bifurcated into four broad c For the purpose of income-demand analysis,
goods and services are categorized as
luxury go
1 2 3 4

Necessary Normal Inferior Luxury

Goods Goods Goods Goods
 Consumer Behaviour

A
Consumer Behaviour

Consumer Choices
- Normal Goods
• Keeping prices constant, The demand for
each good would increase when income
increases,
Or
• The demand for each good would
decrease when income decreases,
• For a normal good the quantity demanded
always changes in the same way as income
changes
1 , positive relationship
1
Consumer Behaviour

Consumer Choices
- Inferior Goods
• An increase of income results in a
reduction in the consumption of one of
the goods. Such a good is called an
inferior good.
• For a normal good the quantity
demanded always changes in the
opposite way as income changes

, inverse relationship
 Consumer Behaviour

X2 is inferior good as its

demand decreases
despite of increase in
income
B

A A
Microeconomics Analysis

Module # 68
Microeconomics Analysis

Consumer Behaviour
Consumer Behaviour

Consumer Choices
- Income consumption Curves
and Engel Curves
“A curve or a graph expressing the
locus of points showing the
consumption bundles of two goods
plotted on the two axes; chosen at
various levels of income, keeping
prices constant”
Consumer Behaviour

Consumer Choices
- Income Offer Curves and Engel
Curves
• The income consumption curve also
known as the income expansion path
and income offer curve.
• An increase in income corresponds to
shifting the budget line outward in a
parallel manner.
• By connecting together the demanded
bundles that we get by shifting the
budget line outward, we get the
income offer curve.
Consumer Behaviour
Consumer Behaviour

Consumer Choices
Engel Curve
• How demand changes as we change
income?
• The For each level of income, m, there will
be some optimal choice for each of the
goods.
• For good 1 the optimal choice at each set of
prices and income, the demand function for
good 1 is x1(p1, p2, m).
• Keeping the prices of goods 1 and 2 fixed
• Engel curve is a graph of the demand for
one of the goods as a function of income,
with all prices being held constant.
Consumer Behaviour

Consumer Choices
- Examples-Perfect Substitutes
• If the two goods are perfect
substitutes
• If p1 < p2, so that the consumer is
spending more in consuming good 1,
then if his income increases he will
further increase his consumption of
good 1.
• Since the demand for good 1 is
x1 = m/p1
the Engel curve is,
A straight line with a slope of P1,
Consumer Behaviour

BL shifts with
income increase

All income
spent on X1
Consumer Behaviour

Consumer Choices
- Examples-Perfect Complements
• The consumer will always consume
the same amount of each good,
with fixed proportion; the income
offer curve is the diagonal line
through the origin/vertex .
• The demand for good 1 is
x1 = m/(P1 + P2), so
The Engel curve (
A straight line with a slope of +
Consumer Behaviour
 Consumer Behaviour
Consumer Choices
- Examples-inferior Goods

X2 • The consumer will always consume

the less amount of that good, with
increase in income; the income offer
curve is the diagonal line through

X2 the origin/vertex .
• The demand for good 1 is moving in
opposite direction to income change
X1 X1

12 18 x1 = - (m/P1 ) so
 Consumer Behaviour

X2
X1 is inferior
X2 is normal

X2 is inferior
X1 is normal

Engel curves /ICC for inferior goods.

(1) if X2 is inferior (2) if X1 is inferior
 Consumer Behaviour
X2
Backward Bending Engel Curve
I=30k

A good can be normal over some ranges I=20k U2

U1
of income, and inferior over others
0 • •
12 18 X1)
m)

30k
•
20k
•
12 X1 (units)
18
 Consumer Behaviour
X2)
I=40k
I=30k U3

I=20k
U1
• U2

0 • •
12 16 18 X1)
Income

40k
•
30k
•
20k
•
12 16 18 X1)
 Consumer Behaviour
X2)
I=40k
I=30k U3

I=20k
U1 • U2
Income consumption curve

0 • •
13 16 18 X1)
Income

40k
•
30k
• Engel Curve
20k
•
13 16 18 X1