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 Good B All combinations of A and B for which the consumer is indifferent AN INDIFFERENCE CURVE

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

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

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

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

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

8. Substitution Effect Good A Good B 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

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

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