Consumer Behaviour and Demand
What the domain tests
Consumer Behaviour and Demand tests utility analysis, indifference curves, the budget line, consumer equilibrium, the law of demand, and elasticity. You must explain why demand curves slope downward and how to calculate and interpret price, income, and cross-price elasticities.
Core rules
- Law of diminishing marginal utility: as consumption of a good increases, marginal utility falls; total utility is maximum when marginal utility is zero.
- Indifference curve: shows combinations giving equal satisfaction; it slopes downward, is convex to the origin, and higher curves mean higher satisfaction.
- Budget line: shows affordable combinations; its slope is −Px/Py. Consumer equilibrium occurs where the budget line is tangent to the highest attainable indifference curve, so MRS = Px/Py.
- Demand: inverse relationship between price and quantity demanded, other things equal. A price change moves along the demand curve; a change in income, tastes, or related-good prices shifts it.
- Elasticity: price elasticity = percentage change in quantity demanded ÷ percentage change in price.
Worked example
Price falls from ₹10 to ₹8 and quantity demanded rises from 100 to 130 units. Percentage change in quantity = 30/100 = 30%; percentage change in price = −2/10 = −20%. Price elasticity = 30% ÷ (−20%) = −1.5; taking the absolute value, demand is elastic because 1.5 > 1. A seller's total revenue rises when price falls if demand is elastic.
Traps that cost marks
Do not ignore the sign when interpreting complements and substitutes: cross-price elasticity is positive for substitutes and negative for complements. Income elasticity is negative for inferior goods. Do not confuse a movement along the demand curve with a shift. Marginal utility, not total utility, determines the demand price.