Consumer Behaviour and Demand
The Consumer Behaviour and Demand domain tests utility analysis, indifference-curve reasoning, the law of demand, demand determinants and elasticity. The exam expects correct diagrams, movement-versus-shift distinctions and numerical elasticity.
Core rules and concepts
- Cardinal utility assumes utility is measurable in utils; ordinal utility ranks preferences.
- Law of diminishing marginal utility: as consumption of a good increases, marginal utility from each extra unit falls, other things equal.
- Law of demand: price and quantity demanded move in opposite directions, other things equal.
- A change in own price causes a movement along the demand curve; changes in income, tastes, related-good prices or expectations cause a shift.
- Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price. Demand is elastic if |E|>1, inelastic if |E|<1, and unit elastic if |E|=1.
Worked example
Price falls from ₹10 to ₹8 and quantity demanded rises from 100 to 130 units. Percentage change in quantity = 30/100 × 100 = 30%. Percentage change in price = 2/10 × 100 = 20%. Elasticity = 30 ÷ 20 = 1.5, so demand is elastic. Using the midpoint formula gives 30/115 ÷ 2/9 ≈ 1.17, still elastic. The base used changes the number, not the elastic/inelastic conclusion here.
Traps that cost marks
Do not shift the demand curve when only price changes. Do not call every inferior good a Giffen good; a Giffen good has a positive price effect. Necessities are generally inelastic, while close substitutes make demand more elastic.