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CONSUMER BEHAVIOUR

CONSUMER BEHAVIOUR. T heory Determinants of demand The Demand Curve Explanations of Demand - utility     - indifference curve analysis     - revealed preference     - characteristics approach. Indifference Analysis. Good A. All combinations of A and B for which the consumer is indifferent

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CONSUMER BEHAVIOUR

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  1. CONSUMER BEHAVIOUR Theory • Determinants of demand • The Demand Curve • Explanations of Demand - utility    - indifference curve analysis    - revealed preference    - characteristics approach

  2. Indifference Analysis • Good A All combinations of A and B for which the consumer is indifferent AN INDIFFERENCE CURVE Good B

  3. Indifference Analysis • Good A Slopes show relative preferences for A and B Good B An A-lover

  4. An Indifference Map • Good A The preferred direction if A and B are both‘goods Good B

  5. The Optimal Combination of A and B • Good A Good B Budget Line

  6. If the Price of B Falls More B is bought and (in this example only) the same amount of A • Good A Good B Budget Line

  7. How to Find the Substitution and Income Effects? More B is bought (and in this example only) the same amount of A • Good A Good B Budget Line

  8. Substitution Effect If the consumer was on the same I-curve as before (same real income) but prices moved to their new level, (budget line has the new slope) more B must be bought • Good A Good B

  9. Income Effect If relative prices don’t change but real income rises • Good A Good B

  10. DEMAND AND ELASTICITY • Price Elasticity of Demand - Measures responsiveness in demand to a change in price - Elastic and inelastic demand - Arc and point measurements • Some important applications of elasticity - tax revenue decisions- state company price increases- exports and imports

  11. FACTORS INFLUENCING ELASTICITY • Availability of substitutes • Proportion of income spent on goods • Durability of good • Number of uses for goods • Addictive goods

  12. DIFFICULTIES IN MEASURING ELASTICITY • Influence of other factors affecting demand • Time period involved • Changes     - between different places     - over time • Lack of precise information • Ambiguities in measurement

  13. INCOME ELASTICITY OF DEMAND • Measures responsiveness in demand to a change in income • measurement usually positive and > 1 for luxuries and < 1 for necessities • Normal, Inferior and Giffen goods     - price effects- income and substitution effects

  14. CROSS ELASTICITY OF DEMAND • Measures responsiveness in demand of one product to a change in the price of another - substitutes  - complements   - independent goods

  15. PRICE ELASTICITY OF SUPPLY • Measures responsiveness of a change in supply to a change in price     - immediate market period- short run - long run  - very long run

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