Consumer Behaviour and Demand
What this domain tests
This domain covers utility, indifference curves, the budget line, consumer equilibrium, the law of demand, determinants of demand, and elasticity. The exam often asks for a definition, a diagram-free explanation, or a numerical elasticity.
Core rules
- Total utility rises while marginal utility falls; when MU is zero, TU is maximum.
- An indifference curve is downward sloping and convex to the origin; higher curves mean higher satisfaction.
- The budget line is PxX + PyY = M, with slope -Px/Py.
- Consumer equilibrium: MUx/Px = MUy/Py, or MUx/MUy = Px/Py.
- The law of demand states an inverse relationship between price and quantity demanded, other things equal.
- Movement along a demand curve is caused by own price; a shift is caused by income, tastes, prices of related goods, or expectations.
- Price elasticity Ed = percentage change in quantity demanded / percentage change in price; ignore the negative sign.
Worked example
Price falls from Rs 20 to Rs 16 and quantity demanded rises from 100 to 120 units. Percentage change in price = (16-20)/20 x 100 = -20%. Percentage change in quantity = (120-100)/100 x 100 = 20%. Ed = 20/20 = 1, so demand is unit elastic.
Traps that cost marks
Elasticity is not the slope of the demand curve. A normal good has a positive income effect; an inferior good has a negative one; a Giffen good is a special inferior good. A rise in the price of a substitute raises demand for the good, while a rise in the price of a complement lowers it. Do not confuse movement along with a shift.