Consumer
behavior
One
of the key analyses under the heading "consumer behavior" refers to
the interaction between price changes and consumer demand. From introductory economics
we know that a reduction in the price of X will result in an overall rise in
the quantity demanded of good X. However, this rise in the quantity demanded is
due to the total price effect, which can be subdivided into two separate parts,
the substitution effect and the income effect.
Quantitative Behavior
Quantitative Behavior means when consumer focus on the
quantity, because due to his limited resources.
For example: I have 1000 R.s in my pocket and I want to buy
only 5 gifts for my friend at this time iam focus on my quantity b/c this is
must for me, due to my limited resources.
Qualitative Behavior
Qualitative Behavior means when consumer focuses on quality.
For example: I have 10000 in my pocket and I want to buy 1 or 2
gifts for my friend at this time iam focus on quantity. B/c my resources are
allowed to me for this.
Indifference curve
Definition: A curve used in economics which shows how consumers would react to different combinations of products. On the graph, a quantity of one product appears on the x axis and a quantity of another product appears on the y axis. Consumers would be equally satisfied at any point along a given curve, as each point brings the same level of utility to that consumer. The slope of the curve is referred to as the marginal rate of substitution.
A diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of goods.
Properties of
Indifference Curves
- Higher indifference curves are preferred to lower ones, since more is preferred to less (non-satiation).
- Indifference curves are downward sloping. If the quantity of one goods is reduced, then you must have more of the other good to compensate for the loss.
- Indifference curves do not cross (intersect), since this would imply a contradiction.
- Indifference curves are bowed inward (in most cases). The slope of indifference curves represents the MRS (rate at which consumers are willing to substitute one good for the other). People are usually willing to trade away more of one good when they have a lot of it, and less willing to trade away goods which are in scarce supply. This implies that MRS must increase as we get less of a good.
Changes
in Prices
A change in price will change the slope of
the curve. A fall in price will rotate the budget constraint outwards, and an
increase in price will rotate the budget constraint inwards. Thus a change in
price will change both the relative prices of the two products and also the
amount that can be bought, ceteris paribus (income). Changes in price have two
effects:
- Substitution Effect
- arises from the tendency to buy less of goods which are more expensive
- can be measured by keeping satisfaction constant (stay on same indifference curve and finding where MRS = new relative prices
- Income Effect
- arises from change in price effect on total amount that can be purchased
- change in consumption when we shift to a new indifference curve as a result of the price change
