Consumer Behavior
Chapter 2
Demand
• Demand simply means a consumer’s desire to buy goods and services
without any hesitation and pay the price for it.
• In simple words, demand is the number of goods that the customers
are ready and willing to buy at several prices during a given time
frame. Preferences and choices are the basics of demand, and can be
described in terms of the cost, benefits, profit, and other variables.
• Quantities of a good or service that people are ready , willing and
able to buy at various prices within some given time period
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Demand Function
• Demand function is what describes a relationship between one variable
and its determinants. It describes how much quantity of goods is purchased
at alternative prices of good and related goods, alternative income levels,
and alternative values of other variables affecting demand.
• The principal variables that influence the quantity demanded of a good or
service are
• (1) the price of the good or service,
• (2) the incomes of consumers,
• (3) the prices of related goods and services,
• (4) the tastes or preference patterns of consumers,
• (5) the expected price of the product in future periods, and
• (6) the number of consumers in the market.
Types of Demand
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Law of Demand
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Example for Market Demand
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Determinants of demand
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Determinants of Demand
• There are many determinants of demand, but the top five determinants of demand are as
follows:
• Product cost: Demand of the product changes as per the change in the price of the
commodity. People deciding to buy a product remain constant only if all the factors
related to it remain unchanged.
• The income of the consumers: When the income increases, the number of goods
demanded also increases. Likewise, if the income decreases, the demand also decreases.
• Costs of related goods and services: For a complimentary product, an increase in the cost
of one commodity will decrease the demand for a complimentary product. Example: An
increase in the rate of bread will decrease the demand for butter. Similarly, an increase in
the rate of one commodity will generate the demand for a substitute product to increase.
Example: Increase in the cost of tea will raise the demand for coffee and therefore,
decrease the demand for tea.
• Consumer expectation: High expectation of income or expectation in the increase in price
of a good also leads to an increase in demand. Similarly, low expectation of income or low
pricing of goods will decrease the demand.
• Buyers in the market: If the number of buyers for a commodity are more or less, then
there will be a shift in demand.
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Concept of Elasticity
Elasticity of Demand
• Elasticity is a concept in economics that talks about the effect of change in one
economic variable on the other.
• Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity
demanded of a product in response to a change in any of the market variables,
like price, income etc. It measures the shift in demand when other economic
factors change.
• “Elasticity of demand may be defined as the ratio of the percentage change in
demand to the percentage change in price.”
• The demand for a commodity is affected by different economic variables:
• Price of the commodity
• Price of related commodities
• Income level of consumers
Determinants of Elasticity of Demand
• Consumer Income
• Amount of Money Spend
• Nature of Commodity
• Different uses of Commodity
• Existence of Substitute
• Joint Demand
• Range of Price
https://www.studocu.com/row/document/jahangirnagar-university/account
ing/7-determinants-of-elasticity-of-demand-abd037/15831919
Types of Elasticity
• https://economicpoint.com/types-of-elasticity
1)Price Elasticity of Demand (PED)
• The quantity requested for a product is affected by any change in the price of a
commodity, whether it be a drop or an increase. For example, as the price of
ceiling fans rises, the quantity requested decreases.
• The Price Elasticity of Demand is a measure of the responsiveness of quantity
sought when prices vary (PED).
• The mathematical formula for calculating Price Elasticity of Demand is as follows:
• PED = %Change in Quantity Demanded % / Change in Price.
• The formula's output determines the magnitude of the influence of a price
adjustment on the amount required for a commodity.
E.g.: Salt, any medicine
E.g.: All Durable Goods E.g.: necessary Goods
Factors Affecting Price elasticity
• Number of Substitute available
• Necessary Goods
• Share in total Expenditure
• Price of Product in relation to income
• Different uses of the commodity
• Brand Loyalty
• https://corporatefinanceinstitute.com/resources/economics/elasticity/
• https://www.yourarticlelibrary.com/economics/9-major-factors-which-affe
cts-the-elasticity-of-demand-of-a-commodity-economics/8946
https://corporatefinanceinstitute.com/resources/economics/in
come-elasticity-of-demand/
1. Positive income elasticity of demand
• It refers to a condition in
which demand for a
commodity rises with a rise in
consumer income and declines
with a decline in consumer
income. Commodities with
positive income elasticity of
demand are normal goods.
• The upward slope implies that the rise in income contributes to a rise in
demand and vice versa. There are three forms of positive income elasticity
of demand stated as follows:
• Unitary – The positive income elasticity of demand will be unitary if the
proportionate change in the amount of a product demanded equals the
change in consumer income in due proportion.
• More than unitary – The positive income elasticity of demand will be more
than unitary if the proportionate change in the amount of a product
demanded is higher than the change in consumer income in due
proportion.
• Less than unitary – If the change in the amount of a product demanded in
due proportion is less than the change in consumer income in due
proportion, positive income elasticity of demand will be less than unitary.
2. Negative income elasticity of demand
• It refers to a condition in which demand for a
commodity decreases with a rise in consumer
income and increases with a fall in consumer
income. Inferior goods are such commodities.
For example, the demand for millet will
decrease if the income of consumers increases
since they will prefer to purchase wheat instead
of millet. Thus, millet is an inferior good to
wheat for customers.
• The downward slope implies that the increase
in income contributes to a fall in demand, and a
decrease in income causes a rise in demand.
3. Zero income elasticity of demand
• It corresponds to the situation
when there is no impact of rising
household income on commodity
production. Such goods are termed
essential goods. For example, a
high-income consumer and a
low-income consumer will need
salt in the same quantity.
Income Elasticity
Uses of Income Elasticity of Demand
• 1. Forecasting demand
• Forecasting demand applies to the idea that the income elasticity of
demand tends to predict demand for commodities in the future. If there is
a substantial change in wages, the change in demand for products will also
be significant. This is because when buyers become aware of a shift in
income, they will change their preferences and expectations for such
products.
• 2. Investment decisions
• The idea of national income is very important to businesses as it helps them
to decide which sectors they should invest their money in. In general,
investors tend to invest in markets where they can predict that the demand
for commodities is related to a growth in national income or where the
income elasticity of demand is greater than negligible.
Cross elasticity
• https://www.wallstreetmojo.com/cross-price-elasticity-of-demand/
• https://www.investopedia.com/terms/c/cross-elasticity-demand.asp
• The cross elasticity of demand is an economic concept that measures
the responsiveness in the quantity demanded of one good when the
price for another good changes. Also called cross-price elasticity of
demand, this measurement is calculated by taking the percentage
change in the quantity demanded of one good and dividing it by the
percentage change in the price of the other good.
Important Topics
• Define demand and explain its importance in economics.
• Differentiate between individual and market demand.
• List three factors that can affect the demand for a product.
• Define the demand function and its role in economic analysis.
• List and Explain types of consumer behavior
• Explain the concept of consumer surplus.
• List application of consumer behavior with marketing prospect
• Discuss the various types of demand with examples.
• Analyze five factors that can influence the demand for a luxury good.
• Explain how to construct a linear demand function and its application in business.
• Consider two goods X and Y , there was no change in price of X, but its demand
was seen to fall from 6000 units to 5500 units. On analysis it was found that price
of another commodity Y has decreased from Rs. 250 to 225. Find out the cross
elasticity between X and Y and the relationship between two goods.
• Compare and contrast the types of elasticity of demand, focusing on price
elasticity, income elasticity, and cross elasticity.
• State the law of demand and provide a real-life example.
• Compare and contrast two different methods of demand forecasting, highlighting
their strengths and limitations.
• Explain Consumer behavior model based on involvement
• The initial income of a person is Rs. 2000 and quantity demanded for the commodity by
him is 20 units. When his income increases to Rs. 3000. Quantity demanded by him also
increases to 40 units. Find out the income elasticity of demand
• The price of a commodity falls from Rs 20 per unit to Rs 15 per unit and due to this, the
quantity demanded of that commodity increases from 100 units to 150 units. Calculate
the price elasticity"
• Explain price elasticity of demand and it's various types with example
• Explain the concept of income elasticity of demand and its application in business
decision-making.
• Explain factors affecting consumer behavior
• Discuss the significance of demand forecasting for businesses, emphasizing its features.
• Describe the various methods used in demand forecasting, highlighting their features.
