Consumer Behaviour and Demand
Consumer Behaviour and Demand
This domain tests utility analysis, indifference-curve reasoning, the law of demand, and elasticity. CHSE questions often ask you to distinguish cardinal and ordinal utility, explain why demand curves slope downward, and calculate price elasticity.
Core rules
- Total utility rises while marginal utility is positive; total utility is maximum when marginal utility is zero; negative marginal utility reduces total utility. The law of diminishing marginal utility states that successive units yield less additional satisfaction.
- An indifference curve shows combinations giving equal satisfaction. It slopes downward, is convex to the origin, and higher curves represent higher satisfaction. The budget line shows affordable combinations; its slope is the price ratio.
- Consumer equilibrium under ordinal utility occurs where the indifference curve is tangent to the budget line, so MRS equals the price ratio.
- The law of demand: other things equal, quantity demanded falls as price rises. A change in price causes movement along the demand curve; a change in income, tastes, prices of related goods or expectations shifts the curve.
- Price elasticity = percentage change in quantity demanded ÷ percentage change in price. Demand is elastic if the absolute value is greater than 1, inelastic if less than 1, and unitary if equal to 1.
Worked example
Price falls from ₹10 to ₹8, and quantity demanded rises from 40 to 60 units. Percentage change in quantity = 20 ÷ 40 × 100 = 50%. Percentage change in price = −2 ÷ 10 × 100 = −20%. Elasticity = 50 ÷ (−20) = −2.5, so demand is elastic. Total expenditure rises from ₹400 to ₹480, which confirms elastic demand when price falls.
Traps
Do not treat a shift in demand as a movement along the curve. Inferior goods have negative income elasticity; Giffen goods are a special inferior case where demand rises with price. Elasticity is not the slope. Use the same base for percentage changes and state the method.