Consumer Behaviour and Demand
What this domain tests
This domain tests utility analysis, indifference-curve reasoning, the law of demand, and price elasticity of demand. You must be able to explain why demand curves slope downward and calculate elasticity.
Core rules
- Law of diminishing marginal utility: as consumption of a good rises, marginal utility from each extra unit falls.
- Indifference curve: shows combinations giving equal satisfaction. It slopes downward and is convex to the origin; a higher curve means higher satisfaction.
- Budget line: shows affordable combinations; its slope is the price ratio.
- Law of demand: other things equal, quantity demanded falls when price rises. A change in price causes movement along the demand curve; a change in income, tastes or related-good prices shifts the curve.
- Elasticity: Ed = percentage change in quantity demanded ÷ percentage change in price.
Worked example
Price falls from ₹10 to ₹8 and quantity demanded rises from 40 to 50 units. Percentage change in quantity = 10 ÷ 40 × 100 = 25%. Percentage change in price = −2 ÷ 10 × 100 = −20%. Using absolute values, Ed = 25 ÷ 20 = 1.25. Demand is elastic because Ed > 1.
Traps that cost marks
Do not say a price rise “reduces demand”; it reduces quantity demanded. Do not call a movement along the curve a shift. Remember that inferior goods have negative income elasticity, while Giffen goods are a special exception to the law of demand. Elasticity is not the same as slope, and a necessity can still have low elasticity without being perfectly inelastic.