Micro Economic Theory & Applications-I Introduction & Demand Analysis

AMITY BUSINESS SCHOOL (ABS)
Micro Economic Theory &

Applications-I
Module-I
Introduction & Demand Analysis
Wednesday, December Dr Arun Bhadauria, Assistant Prof 1

8, 2021 essor & Prog Coordinator, Agribu
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Introduction
• Many writers of the early days defined
economics as "a science of wealth". Adam Smith
commonly know as the father of modern
economics, defined economics as "An enquiry
into the nature and causes of wealth of nations."
• These definitions were defective because they
gave much importance to wealth. As wealth is
not everything, it only leads to achieve welfare of
human. Therefore it is man who is the aim of all
of the economic activities.
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Marshall’s Definition
• Professor Dr. Alfred Marshall was the first
economist who gave a logical definition of
economics.
• He defined economics as:
"A study of mankind in ordinary business
of life, it examine that part of individual and
social actions which is closely related with
attainment and use of material requisites“
• This definition gave a new direction to the study
of economics.
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Characteristics Of Definition
• A Social Science
This Definition makes economics a social science. It is a
subject that is concerned with the people living in
society. According to Marshall, as the behavior of human
beings is not same all the time therefore principles of
economics cannot be formulated like the laws of
sciences. Further laws of economics are not as exact as
the laws of natural sciences. For this reason it is a social
science.
• Study Of Man
Economics is related to man; therefore it is living subject.
It discusses economic problems and behavior of man.
According to Marshall it studies the behavior of man In
ordinary business of life.
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Cont’nd…
• Wealth As A Means Of Material Well Being
According to Marshall, wealth is not the ultimate
objective of human activities and therefore we do not
study wealth, for the sake of wealth. Therefore according
to this definition we study wealth as a source of
attainment of material welfare.
• Economics And Welfare
This definition makes economics a welfare oriented
subject. We are concerned only with those economic
activities which do not promote material welfare of
human beings are out of the scope of economics.

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Cont’nd…
• Materiality
Marshal stresses upon the concept of "material requisite
of well being". Therefore according to this definition all
economic activities resolve around the acquisition and
use of material goods like food, clothing etc. because
they increase welfare of human beings. On the other
hand non-material requisites of human life like education,
recreation are ignored.
• Normative Outlook
According to this definition economics should take care
of good and bad aspects of economic activities and
therefore involve itself in "what should be and what
should not be". This is called normative aspect of
economics.
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CRITICISM
"Robbins and other many economists severely
criticized this definition on following grounds."
• Limited To Material Welfare
This definition limits the subject of economics to
material welfare of people. But the subject of
economics is not limited to the study of material
welfare of human beings. In reality both material
and non material aspects of wellbeing are
studies in economics.

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Cont’nd…
• Vague Concept of Welfare
The concept of welfare used in this definition is
also not clear. The welfare of human beings is
not limited to the attainment of material
requisites. There are many other factors which
affect the human welfare. Further the word
"welfare" has different meaning for different
persons and different societies. Therefore we
cannot define economics using an unclear
concept of welfare.
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Cont’nd…
• Limited Scope
This definition has made the scope of economics
limited. Only those activities are studied in
economics which are aimed at the attainment of
material requisites of well being. Further it
ignores the economic activities of a person not
living in society. Attainment of non material
requisites of human well being fall out of the
scope of economics. This division of material
and non material aspects of human welfare is
not correct.
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Cont’nd…
• Economics And Welfare
According to Robbins the study of economic activities on
the basis of welfare is not good. It is not the duty of an
economist to pass verdict that what is conducive to
welfare and what is not. Thus according to Robbins
"Whatever Economics is concerned with, it is not
concerned with causes of material welfare as such.
• Moral Judgment
In this definition Marshall makes economics a subject
which considers the right and wrong aspect of economic
activities. According to Robbins economics in neutral as
regards ends and it is not the function of an economist to
pass moral judgments and say what is good and what is
bad.
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Cont’nd…
• Unrealistic
This definition appears to be unrealistic as we analyze it
critically. The unclear concept of welfare, the division of
ends into material and non material, the stress on good
and bad, the concept of man living in society etc. all
these concepts put unnecessary restrictions and make
the scope of economics limited. These ideas make the
definition unrealistic.
• CONCLUSION
Although this definition gave a new direction to the
subject of economics but it had many weaknesses.
Some of the faults of definition are discussed above. For
these reasons this definition was replaced by other new
definitions of economics.
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LIONEL ROBBINS
• Lionel Robbins was a professor at University of London.
He wrote his book ‘Essay on Nature and Significance of
Economic Science’ in 1932 (75 years ago).
• According to him ‘economics is science, which
studies human behavior as a relationship between
ends and scarce means, which have alternative,
uses.
• Ends means wants of human beings, which are unlimited
whereas resources to satisfy them are limited.
• Scarce resources have alternative uses; therefore,
choice making becomes essential. A person fulfills that
desire; first, which is more important to him.

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Cont’nd…
• Robbins emphasized that, ‘Economics is a
science which studies human behavior as a
relationship between ends and scarce means
which have alternative uses’.
His main emphasis is on the following points: -
• Human desires are unlimited.
• All desires are not equally important.
• One desire can be fulfilled by alternative means.
• Resources are limited.
• Resources can be utilized for different purposes.
• Economics is a scientific subject
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J. M. KEYNES
• Keynes was a professor at University of
Cambridge.
• He wrote his book ‘General Theory of
Employment, Interest and Money” in 1936.
• The Depression of 1930 had affected national
economies of the world.
• In United States, real GDP declined by 40
percent and unemployment rate rose to 25%.
• Other nations experienced similar impacts and
cyclical unemployment continued for a decade.
Keynes explained why cyclical
unemployment could occur in a market
economy.
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Keynesian Economics
• He pointed out that not all income is spent in the same
period that it is produced. Investment expenditure is
volatile.
• A substantial decline in investment will lead to insufficient
total expenditure.
• Unsold goods will accumulate in firm’s warehouses and
firms will reduce their output and remove workers.
• A depression will result and widespread cyclical
unemployment will occur.
• He said that recessions or depressions are not likely to
correct themselves.
• He argued that government should play an active role in
stabilizing economy.

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Cont’nd…
• Keynesian economics is macro economic analysis
that leads to the conclusion that a capitalistic
economy is characterized by macro economic
instability for which fiscal policy and monetary
policy can be used to promote full employment,
price level stability and economic growth.
• Classical economists said that laissez-faire policy
of govt. is best. Keynes said laissez-faire capitalism
brings widespread unemployment.
• In his view active govt. policy is required to stabilize
economy and to prevent valuable resources from
standing idle.
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Samuelson’s Definition
• Economics is a study of how people
and society end up choosing with or
without the use of money, to employ
scarce productive resources that
could have alternate uses;
• it studies production of various commodities
over time and their distribution for
consumption, now or in future, among various
groups in the society.
• It analyses costs and benefits of improving
patterns of resource allocation.

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ECONOMICS AS A SCIENCE
• Economics, like other social sciences, make little use of
laboratory methods in which changes in variables can be
explained in controlled conditions.
• Economists usually have to examine what has already
happened in the past in the real world in order to test
their theories.
• If a simple model can explain observed behavior
repeatedly, it has some value, for example, law of
demand explains cause and effect relationship between
price and demand for a good. With the fall in price
(cause), demand of a good increases (effect) and with
rise in price of good, its demand decreases. All economic
laws have similar cause and effect relationships.

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Cont’nd…
• Economics is not an exact science because it depends
upon economic behavior of a man and behavior of a
person is very complex and unpredictable.
• Economics is a social science, which is concerned with
proper use and allocation of resources for the
achievement and maintenance of growth with stability.
• In Economics for analyzing facts we move step by step.
• We firstly, collect facts, (secondly), we very analyze
these collected facts, (thirdly), we put these facts under
suitable classifications and (fourthly), we discover
general theories governing these facts.

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ECONOMICS AS AN ART
• Science is a theoretical aspect whereas Art is a practical
aspect.
• In economics we study consumption, production, public
finance etc, which provide practical solutions to our daily
economic problems.
• Study of cause and effect of inflation or deflation falls
within the purview of science but framing appropriate and
suitable monetary and fiscal policies to control inflation
and deflation is an art.
• Lionel Robbins used the word science for Economics. He
says Economics is a science, which studies human
behavior as a relationship between ends and scarce
means that have alternative uses.

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Cont’nd…
• Economists on Continent of Europe have
emphasized Art side of economics and have
pointed out the great practical utility of
Economics.
• According to Keynes study of fiscal & monetary
measures and their application to solve
problems of unemployment, depression, and
inflation etc for promoting welfare of human
being makes economics an art.
• Economics is a science light-giving in its
methodology and an Art, fruit-bearing in its
application.
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POSITIVE ECONOMICS
• Positive Economics or positive science or positive
analysis describes facts of an economy.
• It describes theories and laws to explain observed
economic phenomena.
• It avoids value judgment, tries to establish scientific
statements about economic behavior and deals with what
the economy is actually like.
• It is the analysis of facts and behavior in an economy or
‘the way things are’ for example, there is inequality of
income in economy of Pakistan. This simple statement is
called Positive Economic analysis.
Robbins said that functions of Economics are
to explore and explain and not to advocate
Wednesday, December
andDr condemn the things.
Arun Bhadauria, Assistant Prof 22
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NORMATIVE ECONOMICS
• Normative economics or normative analysis involves value
judgments about what, how and for whom of an economy.
• It looks at the desirability of certain aspects of economy.
• It embodies subjective feelings about what ought to be.
• In nutshell we can say that positive economics describes facts
while normative economic s evaluates facts.
There is general unemployment in Pakistan. It is a
fact and therefore it is positive analysis. There
should not be general unemployment in Pakistan.
It is a value judgment/opinion and tells what ought
to be, hence, it is a normative analysis.
• Whenever words such as ‘ought’ or ‘should’ appear in a
sentence there is a chance that normative economics is being
discussed.
Wednesday, December
8, 2021
Dr Arun Bhadauria, Assistant Prof
essor & Prog Coordinator, Agribu
23
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MICRO ECONOMICS
• Microeconomics is that part of economic analysis which
studies decisions of individuals and firms in economy.
• It is microeconomics that tell us how a free market
economy with its millions of consumers and producers
work to decide about allocation of productive resources
among thousands of goods and services.
• It tells us how goods and services produced are
distributed among various people for consumption
through price mechanism. It is like looking through a
microscope to focus in small parts of economy.
• In it we study demand of one consumer for a good and
from there we go to derive market demand for that good.

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Cont’nd…
In microeconomics we study following issues.
• Individual consumer’s behavior.
• One product’s price
• One individual consumer’s demand and his income
• Study of individual firm’s location, cost, revenue, and profit
• Remuneration of individual factors of productions While
conducting economic analysis on micro basis we assume
that in economy there is full employment.
• Microeconomics explains how consumers and producers
take their decisions regarding allocation of productive
resources among various goods and services.
• How through market mechanism goods and services
produced in economy is distributed and how prices of goods
and remuneration of factors of production is determined.
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MACRO ECONOMICS
• It is primarily concerned with the behavior of economic
system as a whole and in its totality.
• In using aggregates, it seeks to obtain an overview or
general outline of the structure of economy and the
relationships of major aggregates.
• It deals with economy wide phenomena such as changes
in unemployment, general price level & national income
etc.
• Macro analysis is helpful in understanding the
functioning of economic system because one individual’s
economic study is not helpful for framing any policy,
hence whole economy’s study and its analysis is
important.

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Cont’nd…
It deals with the following: -
• National income and national output.
• Balance of Trade and Balance of payments.
• External value of money (Foreign exchange).
• Savings and Investment relationship.
• Employment and economic growth
• Fluctuations in national income /Trade cycles in
economy
• Fiscal & Monetary policies.
• General Price level
• Aggregate output & aggregate supply of goods &
services

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BLENDING MICRO AND MACRO
ECONOMICS
• There is blending of microeconomics and macroeconomics in
modern economic theory.
• Modern economists are increasingly using microeconomic analysis
—the study of decision-making by individuals and by firms--- as the
basis of macroeconomic analysis.
• They do this because even though in macroeconomic analysis
aggregates are being examined, those aggregates are made up of
individuals and firms.
Consider an example. Some economists believe that reducing
income tax rates will lead to greater total output. Why?
Because, using microeconomic analysis, they predict that
individuals will respond to lower income tax rates by working
longer, taking fewer vacations and taking on second jobs and
using the extra take-home pay to buy more goods and services.

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Differences b/w
• In Microeconomics we examine the sand,
rocks and shells and not the beach.
• In Macroeconomics we examine the
beach, not the sand, rocks, and shells.
• Microeconomics is concerned with choice
making processes of individuals & firms,
• whereas Macroeconomics focuses on
performance of economy of country as a
whole.
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SCARCITY AND CHOICE
• Scarcity is not a shortage.
• Scarcity occurs among poor and rich alike.
• Economics is a study of how scarce resources
can be used to satisfy our wants.
• Scarce resources are raw materials, energy and
labor etc. that can be used to produce goods
and services in the economy to satisfy human
wants and needs.

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Cont’nd…
• Scarcity is a relative term.
• A product may be available in small quantity but
if no one has any use of this product then it is
not scarce.
• In the same way there may be too much stock of
sugar, wheat, rice and clothes in the country
even then these items are called scarce
because demand for sugar, wheat, rice and
clothes is greater than their supply.
• It is demand in relation to supply of a good and
not its quantity alone that determines whether a
particular product is scarce or not.
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Cont’nd…
• Scarcity means limited means and resources to satisfy
human wants. Since resources/means are limited at the
disposal of an individual or nation, choices are
necessary.
• Economic activity lies in individuals’ utilization of scarce
resources that have alternative uses for satisfaction of
individual or nation’s wants.
• As all demands cannot be met with limited resources, an
individual will make a choice and will fulfill that demand
first which is more important to him. So is the case with a
nation as a whole. An easy example of the problem of
choice is a person’s decision about how to allocate his
time.
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Cont’nd…
• As the old saying goes, ‘There are only 24 hours in a
day, if we take off 8 hours for a night’s sleep this leaves
16 hours to be allocated among all other possible
activities that is (1) working at job (2) studying course
books (3) playing cricket (4) watching TV etc.
• Each person must make choices as to how much of his
limited available time, 16 hours, will be spent on his each
possible activity.
• Scarcity means that we do not and cannot have
enough income or wealth to satisfy our every desire.
• Scarcity exists because human wants always exceed
what can be produced with the limited resources and
time that nature makes us available.

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PRICE MECHANISM
• Price Mechanism or price system or
market economy is an economic system in
which relative prices constantly change to
reflect changes in supply and demand of
different goods.
• Prices of commodities are signals to every
one within the system as to what is
relatively scarce and what is relative
abundant. It is the signaling aspect of price
system that provides information to buyers
and sellers about what should be bought
and what should be produced.
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Cont’nd…
• In Microeconomics we examine the sand,
rocks and shells and not the beach.
• In Macroeconomics we examine the
beach, not the sand, rocks, and shells.
• Microeconomics is concerned with choice
making processes of individuals & firms,
• whereas Macroeconomics focuses on
performance of economy of country as a
whole.
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CHARACTERISTICS OF PRICE
MECHANISM
• What and how much should be produced?

• How should it be produced?
• For whom goods are to be produced?
• Determination of money income.

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Economic Problem
WHAT AND HOW MUCH TO PRODUCE?
• In a price system interaction of demand
and supply for each good determines as to
what
• and how much to produce. If highest price
that consumers are willing to pay for a
good is
• less than the lowest cost of production,
then output will be negligible or zero.
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Cont’nd…
HOW TO PRODUCE?
• A firm can use various combinations of
labor and capital to produce the same
amount of
• output. In price system, the least cost
combination technique is chosen because
it
• maximizes profit. Firms using this
technique will be able to offer for sale their
goods at a
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Cont’nd…
• lower price and will make profit. Lower
price will induce consumers to shift their
• demand from high priced goods to low
priced goods. Inefficient firms will be
forced to
• go out of business and firms will close
their inefficient business and will induce
• consumers to shift their demand from high
priced goods to low priced goods.

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Cont’nd…
FOR WHOM GOODS ARE PRODUCED?
• In a market system, choices about what is to be
produced are made by individual firms, but this choice is
determined by distribution of money incomes in the
society.
• Those people who will have higher income, they would
demand different commodities than those who have less
income.
• Those consumers who are able to pay the price of good
can obtain it, otherwise poor people like Mr. Shyam who
cannot afford, will not have burgers of McDonald’s. The
only thing that he can do is a Window-shopping.

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Cont’nd…
DETERMINATION OF MONEY INCOME
• When a person is selling his labor services then
his money income is based on his wages, which
he can get in labor market.
• If a person owns land and capital then rent of
land and interest of his capital will determine his
ability to buy consumer goods.
If his income from wages, interest and rent is
less then his demand for goods will be less.

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ECONOMIC WANTS
• Economic wants means desire for goods and services.
• The attempt to satisfy wants forms the basis of all
economic activity.
• Wants are expressed in market not by desire but by
willingness and ability to actually purchase goods and
services.
• A desire of a person cannot become want unless and
until he has money to purchase and is also willing to give
away money for that good.
• Economic wants are fulfilled by consumptions of goods
and services.

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These wants are classified into the following:
• Necessities of life are basic needs of a person,
without out which life is not possible. These
include ordinary food, clothing and shelter.
Comforts of life make life easy and comfortable.
These wants increase efficiency of a person.
These wants include vitaminized food,
comfortable bed & transport facilities.
• Luxuries of life are neither necessary nor they
increase efficiency of a person. These wants are
for pomp and show and for mental satisfaction of
a consumer. These wants include an expensive
car, a big bungalow, and costly jewellery etc.

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CHARACTERISTICS OF
ECONOMIC WANTS
• WANTS ARE UNLIMITED
– Economic wants are unlimited, after fulfilling one want another
want comes up, hence there is no end to them.
• WANTS ARE REPEATED
– Wants once fulfilled, never ends, they are repeated again and
again. Wants to fulfill hunger, thirst and clothing keeps on
repeating.
• WANTS COMPETE WITH EACH OTHER
– Some wants are felt urgently than others. Some of them cannot be
postponed while others can be postponed. An individual will fulfill
his that want first, which is more pressing and important to him.
• WANTS CAN BE FULFILLED BY ALTERNATIVES
– Some wants can be fulfilled with the use of alternative goods, for
example eating rice; bread or fruits can satisfy our want of hunger.

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PUBLIC GOODS
• Public goods have zero marginal cost i.e. they could be
provided or their benefit could be extended to additional
consumers without incurring further cost.
• These are those goods to which principle of rival
consumption does not apply.
• These goods can be consumed by many individuals
simultaneously at no additional cost and with no
reduction in quality or quantity of good.
National defense, police protection and legal system
for example are public goods. If you partake of them,
you do not take away any one else’s share of those
goods. A Smallpox vaccine, a drop of polio, street
light & similar Govt. projects are examples of public
goods.
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CHARACTERISTICS
AMITY OF PUBLIC
BUSINESS SCHOOL (ABS)
GOODS
• Public goods cannot be produced or sold very easily in small units.
• More and more people at no additional cost can use public goods.
• Once money is spent on national defense, the defense protection
received by one person does not reduce the amount of protection of
another person.
• Additional users of public goods do not deprive other peoples right of
any of the services or the goods.
• If one person turns on his television set, his neighbors do not get
weaker reception of TV program. No one can be excluded from benefits
of a public good, even though a person has not paid for it.
• A very poor person does not pay any tax, yet he cannot be denied
benefits of Govt. hospitals and police protection.
• Public goods cost of extending the service to an additional person is
zero and it is impossible to exclude individuals from enjoying them.
• Public goods are ones whose benefits are indivisibly spread among the
entire community, whether the individuals desire to purchase the public
good or not.
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QUASI RENT
• Alfred Marshall gave this concept. According to him some factors of
production may be in relatively price-inelastic supply in short-run but
more elastic supply in long-run and thus may earn temporary
economic rents until supply is able to adjust fully to meet the
demand.
• Economic rent accruing to such factors of production is called Quasi
rent and it tends to disappear in long-run as supply catches up with
demand. For example, in the case of particular types of work where
a lengthy training period is required, a sudden increase in demand
for such work would enable persons already possessing appropriate
skills to secure large quasi rents through high wage rates.
• Quasi Rent arises on land whose supply is fixed, it also arises on
building, machinery and highly technical labor and whose supply
become short for the time being but in long run supply of which can
be increased.
• Quasi rent is a temporary surplus and with the increase in supply of
these factors, rent becomes normal.

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GIFFEN GOOD
• It is a good for which quantity demanded increases as its
price increases. It only applies in highly exceptional case
of a good, which accounts for such a high proportion of
household’s budgets that an increase in price produces a
large negative income effect, which completely
overcomes the normal substitution effect.
• Sir Robert Giffen said that a rise in price of bread makes
so large a drain on resources of poor laboring families
that they are forced to curtail their consumption of meat
and other more expensive food items and bread being
still the cheapest food item which these poorer families
can get and will take, they consume more and not less of
it (that is bread). When price of bread rose, poor people
bought more bread and less more expensive foodstuffs.

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Cont’nd…
• Giffin goods are special type inferior goods. It absorbs a
large proportion of consumer’s income.
• Giffin good has two properties. Firstly it is an inferior
good and secondly a consumer is bound to spend a
greater share of his income on such an inferior good.
For example a labor who is earning Rs.500 per month
and if he spends Rs.300 on wheat, when wheat is not
only an inferior good as compared with rice but it is also
a Griffin good because Rs.300 out of Rs.500 is major
share of income which is being spent on wheat.
• When the price of a Giffin good falls consumer purchase
less of it.
• Giffin goods are those goods for which demand
decreases when their prices decrease and demand
increases when their prices increase.
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INFERIOR GOOD
• It is a good for which income elasticity of demand is
negative that is as income increases consumer purchases
less of this good, because they can now afford to replace
them with other more desirable goods, for example people
may reduce demand of potatoes and may increase
demand of mutton burgers.
• Likewise people may reduce demand of old/used
televisions and increase demand of brand new TV sets
with the increase in their income.
• Most goods for which demand rises when income rises
are called Normal goods but for some goods demand
falls as income rises. These are called inferior goods.
In Pakistan demand for Dal-chana and other pulses
falls with increase in the income of consumer.

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TRANSFER PAYMENTS
• Transfer payments are expenditures of Govt. for
which it receives no goods or services in return.
Such payments involve ‘transfer’ of income from
one group of individuals (tax payers) to other
groups of individuals in the form of welfare
provisions.
• for example, unemployment allowance, social
security benefit, old-age pensions to the retired
govt. servants etc
Transfer payments are not made in return for
goods and services therefore they are not
added in national income.
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TRANSFER EARNINGS
• It is a payment that a factor of production must earn to prevent its
transfer to its next best alternative use.
• Earnings that a factor of production receives over and above its
transfer earnings are called its Economic Rent.
• Suppose a Lecturer is presently earning Rs.5000 per month. In case
he has to give up teaching and the next best alternative employment
is an accountant in a firm, which provides him Rs.4000 per month.
Therefore, this amount of Rs.4000 is transfer earnings. This is the
remuneration that he will get on transfer to his next best alternative
employment as an accountant. This means that in his present
position as a lecturer, he must at least get Rs.4000 (his transfer
earnings), otherwise the lecturer will give-up his present position and
will join the next best alternative employment as an accountant.
• Transfer earnings are the minimum payments to be paid to workers to
induce them to stay in present jobs.

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Determinants of demand and

consumption
• Levels of income
• Population
• End market indicators
• Availability and price of substitute goods
• Tastes and preferences

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Demand Analysis
• Demand is the quantity of a good or service that
customers are willing and able to purchase
under a given set of economic conditions.
– Direct demand is the demand for products that
directly satisfy consumer desires.
– The value or worth of a good or service, its utility, is
the prime determinant of direct demand.
– The demand for all inputs is derived demand and
determined by the profitability of using various inputs
to produce output.

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Demand Schedule & Demand Curve

• In economics, the demand curve can be defined as the graph
depicting the relationship between the price of a certain
commodity, and the amount of it that consumers are willing and
able to purchase at the given price ceteris paribus.
• A Demand Schedule is a table listing quantities demanded of a
good at different prices
• A Demand Curve displays the information on cartesian plane
about the relation mentioned exactly in demand schedule.
• Individual demand curve can be derived from personal
income of individual while market demand curve depends
upon the income segment of the segment of consumers.
– Note: the market demand curve is the curve related to the
demand of the commodity demanded by the group of people
to the at different price.

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Demand Analysis
• The market demand function for a product is a
statement of the relation between the aggregate quantity
demanded and all factors that affect this quantity.
– The demand curve expresses the relation between the price
charged for a product and the quantity demanded, holding
constant the effects of all other variables.
• A Change in the quantity demanded is a movement
along a single demand curve.
• A Shift in demand, or shift from one demand curve to
another, reflects a change in one or more of the non-
price variables in the product demand function.
• Unequal shift in demand & supply curve shifts
equilibrium.
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Total-market demand and Market-segment demand
• Demand for a product can be studied in its aggregate or in
its parts by breaking the total demand into different
segments on the basis of geographical areas, price
sensitive’s, sub-product, product uses, distribution
channels, customer’s size, sex etc.
– Problems such as sales forecasting calls for an analysis of total
market demand, but
– problem such as pricing, delivery and promotion require analysis
of market segments.
• Market segments may differ significantly in respect of
delivery prices, delivery quotas, profit margins, seasonal
patens, cyclical sensitivities and market competition.
• Management may have to follow different sets of policies
for different market segments, say, home market and
foreign market or say, wholesale market and retail market.

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Exceptions to the law of demand
• Giffen goods - are products that people
continue to buy even at high prices due to lack
of substitute products
• Veblen effect - people tend to buy expensive
goods to show off their status - conspicuous
consumption
Snob effect - some buyers have a desire to own
unusual or unique products to show that they are
different from others
• Bandwagon effect - preference for a particular
product increases as the number of buyers
purchasing the product increases
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Supply Analysis
• The term supply refers to the quantity of a good or
service that producers are willing and able to sell under a
given set of conditions.
• The market supply function for a product is a statement
of the relation between the quantity supplied and all
factors affecting that quantity.
• A Supply curve expresses the relation between the
price charged and the quantity supplied, holding constant
the effects of all other variables.
• Movements along a supply curve reflect Change in the
quantity supplied.
• A shift in supply, or a switch from one supply curve to
another, indicates a change in one or more of the
nonprice variables in the product supply function.
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Supply Analysis
• A market is in equilibrium when the quantity demanded and the
quantity supplied are in perfect balance at a given price.
• Surplus describes a condition of excess supply.
• Shortage is created when buyers demand more of a product at a
given price than producers are willing to supply. The market
equilibrium price just clears the market of all supplied product.
• In comparative statics analysis, the role of factors influencing
demand or supply is analyzed while holding all else equal.
• A fundamental understanding of demand and supply concepts is
essential to the successful operation of any economic organization.
The concepts introduced in this chapter provide the structure for the
more detailed analysis of demand and supply in subsequent
chapters.

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Problem
• What key ingredients are necessary for the creation of
economic demand?
• The Energy Department estimates that domestic
demand for natural gas will grow by more than 40
percent between now and 2025. Distinguish between a
demand function and a demand curve. What is the
difference between a change in the quantity demanded
and a shift in the demand curve?
• Distinguish between a supply function and a supply
curve. What is the difference between a change in the
quantity supplied and a shift in the supply curve?

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Demand Analysis-II
• The market demand curve shows the total amount of a specific
good or service customers are willing to buy at various prices under
present market conditions. For example, many firms serve various
customer groups like retail and wholesale, domestic and foreign,
student and non-student customers, and so on.
• Factors such as price and advertising that are within the control of
the firm are called endogenous variables;
• Factors outside the control of the firm such as consumer incomes,
competitor prices, and the weather are called exogenous
variables.
• Elasticity is the percentage change in a dependent variable Y,
resulting from a 1 percent change in the value of an independent
variable X.
• Point elasticity measures elasticity at a point on a function.
• Arc elasticity measures the average elasticity over a given range of
a function.

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Elasticity of Demand
• The price elasticity of demand measures the responsiveness of
the quantity demanded to changes in the price of the product,
holding constant the values of all other variables in the demand
function.
• With elastic demand, a price increase will lower total revenue and
a decrease in price will raise total revenue.
• Unitary elasticity describes a situation in which the effect of a price
change is exactly offset by the effect of a change in quantity
demanded. Total revenue, the product of price times quantity,
remains constant.
• With inelastic demand, a price increase produces a less than
proportionate decline in quantity demanded, so total revenues rises.
Conversely a price decrease produces less than a proportionate
increase in quantity demanded, so total revenue falls.

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Cont’nd…
• Demand is said to be “elastic” when the
(own price) elasticity of demand is more
negative than 1
• Demand is said to have “unit elasticity”
when the (own price) elasticity of demand
is –1
• Demand is said to be “inelastic” when the
(own price) elasticity of demand is less
negative than –1
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Kinds of price elasticity of (ABS)
AMITY BUSINESS SCHOOL
demand
• The elasticity of demand changes
along the length of a demand curve.
• As we move along the demand curve
from left to right, the percentage
change in quantity demanded
(calculated as change in quantity
divided by original quantity) falls and
the percentage change in price
(calculated as the percentage change
in price divided by original price) rises.
• Therefore elasticity decreases as we
move from left to right.
The figure above shows how elasticity
changes along a straight-line demand
curve.

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• elasticity falls as we move from left to right i.e.

elasticity decreases as the price falls and the
quantity demanded increases
• at the mid point of the demand curve the
demand is unit elastic
• the demand is elastic above the midpoint
• the demand is inelastic below the midpoint
• demand is perfectly elastic where the quantity
demanded is zero
• demand is perfectly inelastic where the price is
zero
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MeasurementAMITY
methods
BUSINESS SCHOOL (ABS)
Total outlay method or Revenue method

• Total outlay method of measuring elasticity
of demand was developed by Marshall.
This method tries to measure change in
total expenditure of the consumer or
revenue of a firm due to change in the
price of a good.
• Total outlay or total revenue is calculated
as the multiplication of price and quantity
demanded. This method expresses
elasticity in three ways:
• Unitary elastic (E=1): Total revenue
(outlay) remains unchanged as a result of
price change
• Elastic (E>1): Total revenue (outlay)
increases with fall in price and vice versa
• Inelastic (E<1): Total revenue (outlay)
increases with rise in price and vice versa

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Schedule
Price Quantity demanded Total outlay

Elasticity
($) (units) (price x quantity)
5 50 250
6 45 270 Inelastic (E<1)
7 40 280 Inelastic(E<1)
8 35 280 Unitary(E=1)
9 30 270 Elastic(E>1)
10 25 250 Elastic(E>1)

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Point method
• Point method of elasticity refers to price elasticity of
demand for a good / service at a point on the demand
curve. This method is used to measure small change in
quantity demanded due to small change in price
It is given as the ratio of the percentage change in
quantity demanded of a good to its percentage change in
the price
Thus
• Elasticity of demand = % change in Quantity
demanded / % change in price
= =

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Arc Elasticity of Demand
• The arc elasticity of demand refers to
the relationship between changes in
price and the subsequent change in
quantity demanded.
• Qo is the initial quantity demanded.
• Q1 is the new quantity demanded.
• Po is the initial price.
• P1 is the new price.
• The arc elasticity formula is used if the
change in price is relatively large. It is
more accurate a measure of elasticity
than simple ''price elasticity''.
• If the arc or price elasticity of demand is
greater than 1, demand is said to be
elastic. The demand curve has a ''flat''
appearance.
• If the arc or price elasticity of demand is
less than 1, demand is said to be
inelastic. The demand curve has a
''steep'' appearance.
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Cross Elasticity of Demand
• The quantity of any good that is demanded depends on the prices
of its substitutes and its complements.
• How much demand for one good is effected by changes in the price
of another, associated good is measured by the the first good's
cross elasticity of demand
• The cross elasticity of of demand for substitutes is a positive
number. After all, if the price of good B rises, then the demand for
good A will also rise.
• The cross elasticity of demand for complements is negative. If the
price of good B rises, then the quantity of good A demanded will
fall.

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Income Elasticity of Demand
• What happens to the demand for a
particular good as consumers' incomes
change?
• As you might expect, as income rises,
demand for most, but not all goods
will increase as well.
• For some products, as income rises,
demand for the particular good or
service rises even faster than income.
We can see this in the diagram to our
left; the curve moves upward with ever
increasing slope. We say the good or
service in question is income elastic.
Many ''luxury'' goods are income
elastic; as we get wealthier, we tend to
buy more expensive clothing, and go
on more overseas holidays.

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• There is a relatively simple mathematical relation among
marginal revenue, price, and the point price elasticity of
demand. This relationship greatly simplifies the process
of finding the price/ output combination that will maximize
profits for firms facing a downward-sloping demand
curve.
• The optimal price formula can be written P =
MC/[1+(1/ep)]. Given any point price elasticity estimate,
relevant marginal revenues can be determined easily.
When this marginal revenue information is combined
with pertinent marginal cost data, the basis for an
optimal pricing policy is created.

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• A direct relation between the price of one
product and the demand for another holds for all
substitutes.
– A price increase for a given product will increase
demand for substitutes;
– a price decrease for a given product will decrease
demand for substitutes.
– Goods that are inversely related in terms of price and
quantity are known as complements; they are used
together rather than in place of each other.
– The concept of cross-price elasticity is used to
examine the responsiveness of demand for one
product to changes in the price of another.

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• The income elasticity of demand measures the responsiveness of
demand to changes in income, holding constant the effect of all
other variables.
• For normal goods, individual and aggregate demand is positively
related to income. Income and the quantity purchased typically
move in the same direction; that is, income and sales are directly
rather than inversely related. Therefore, əQ/əI and hence e1 are
positive.
• This does not hold for inferior goods. Individual consumer demand
for such products as beans and potatoes, for example, tends to fall
as incomes rise because consumers replace them with more
desirable alternatives.
• Demand for such products is countercyclical, actually rising during
recessions and falling during economic booms.

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• Goods for which 0 < e1 <1 are often referred to
as no cyclical normal goods because demand
is relatively unaffected by changing income. For
goods having e1 > 1, referred to as cyclical
normal goods, demand is strongly affected by
changing economic conditions.
• Demand analysis and estimation is one of the
most interesting and challenging topics in
microeconomics. This chapter provides a
valuable, albeit brief, introduction to several key
concepts that are useful in the practical analysis
and estimation of demand.

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Problem
• Is the economic demand for a product
determined solely by its usefulness?
• “When I go to the grocery store, I find cents-off
coupons totally annoying. Why can’t they just cut
the price and do away with the clutter?” Discuss
this statement and explain why coupon
promotions are an effective means of promotion
for grocery retailers, and popular with many
consumers.

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Micro Economic Theory &

Applications-I
Module-II
Consumer Behaviour

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Approaches to the analysis of
Consumer Behavior
• Theory is based on an axiom that a consumer is
a utility maximizing entity.
• Classical & Neo-Classical economists, “Utility is
cardinally or quantitatively measurable”.
• Modern Economists, “Utility is not cardinally
measurable”.
• There are two approaches to the analysis of
consumer behavior
– Cardinal Utility Approach
– Ordinal Utility Approach
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The Cardinal Approach In Utility
Theory
• The Law of Diminishing Marginal Utility
• Based on this theory, utility is the satisfaction of consumer from
consumption which can be measurable ( i.e. be quantified ) and
discernible ( i.e. comparable ).
• From the observation of real life situation, the theory suggests that ,
• the total utility of a consumer will increase through consumption, but
for successive units of the
• goods consumed, the additional or extra units of utility got - the
marginal utility will gradually (?)
• diminish.
• The economists at that time ( 1870s ) believed it so the law is in fact
an assertion rather than a scientific
• theory. This is our familiar law of diminishing marginal utility.
• When anyone uses the term “ marginal utility “ it already implies that
utility is assumed to be measurable. Otherwise the concept of
marginality cannot be applied.
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The Law of Equil-Marginal Utility(ABS)
AMITY BUSINESS SCHOOL
Per Dollar
• It suggests that when a consumer buys more of
a good, its marginal utility on the good
decreases, but at
• the same time, other goods will be consumed
less if money income is fixed.
• The rationale is that as long as the marginal
utility of any two or more goods are different, a
consumer will try to consume the good with a
higher marginal utility.
• Example
• Given : Income = $14 ; Price of A = $1 ; Price of B = $2.
• Result : M U of A / Price of A = M U of B / Price of B = 7 units of
utility / $ 1

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Quantity Good A Good B Possibilities

TU MU TU MU QA QB T U of A & B
0 0 / 0 / 0 7 0 + 110 = 110
1 10 10 24 24 2 6 19 + 104 = 123
2 19 9 45 21 4 5 34 + 94 = 128
3 27 8 64 19 6 4 45 + 80 = 125
4 34 7 80 16 8 3 52 + 64 = 116
5 40 6 94 14
6 45 5 104 10
7 49 4 110 6
8 52 3 114 4

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The Ordinal Approach In Utility Theory
• The ordinal theory suggests that utility is only
relatively discernible but not quantifiable.
• Utility is, in fact, a series of assigned numbers to
rank options by the consumer preference. The
assigned
• numbers reveal what is more preferred but cannot tell
how much the difference is.
• In other words, utility can only be ranked by an
order or a scale of preference to show the degree of
• willingness of a consumer.
• Consumer preference denotes an observation
pattern of choice, while utility is an ordinal scale
• constructed to represent that regular pattern
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Assumptions
• From here, it comes the axioms or propositions on the
assumption of rationality :
• Consumer is capable of comparison and makes
substitution on goods to show his indifference on the
goods consumed.
• Consumer must have a scale of preference in mind
before he purchases. He is consistent in buying and also
clear about his different level of satisfaction ( but he
cannot tell how much ) satisfaction can be obtained
through the consumption of different goods, i.e. there is
the possibility of transitivity.
• Utility maximization and a state of optimum are revealed
by the very fact that consumer always prefers more to
less.
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The Indifference Curve
• Based on these assertions, Edgeworth F. Y. ( 1845 - 1926 ) first
suggested the indifference curve to represent the level of
preference ( satisfaction ? ) a consumer have when two goods are
consumed with different amount, but each combination of these two
goods yields the same level of preference.
• The properties of the indifference curve include :
• It is the locus of the combination of two goods that are equally
satisfied to a consumer, or to which the consumer is indifferent.
• The slope of this curve is negative : there is some degree of
substitution between the two goods.
• The curve is convex to the origin, i.e. the marginal rate of
substitution of two goods is diminishing.
• M R S in consumption (= Y/X)= the number of
a good Y that had to be given up for each unit of good X to maintain
the same level of utility, along any point on the indifferent curve.

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Cont’nd…
• A curve further away from the origin means that it stands for a higher
level of preference than the one near to the origin. Again, the
magnitude between any two indifference curves does not matter.
• As a consumer changes his choice in a continuous process, so there
must have at least another curve between any two indifference curves,
i.e. there may have infinite number of curves for a single consumer on
a good.
• There is no intersection for any two curves in the indifference map. It is
therefore only useful to compare points on the same curve. The
marginal rate of substitution in consumption is a measure of change
along the curve only, not the shift of the curve because different curves
represent different levels of preference and cannot be compared.
• The different shapes of the indifference curves indicate different
degrees of substitution of the good.
• To a consumer, goods can be closed substituted ; completely
substituted or simply no substitution at all.

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Condition of Consumer Optimum
AMITY BUSINESS :
SCHOOL (ABS)
Utility Maximization
• From the example above, the consumer will consume a
different quantity of good A and B.
• The MU ( obtained by the last dollar spent ) derived from
the good A & B will equal so that a state of
• equilibrium could be reached.
• MUX / PX = MUY / PY = MUZ / PZ .....
( A state of consumer optimum )
• If the equation is re-written into another form :
• MUX / MUY = P X / PY ..... ( The ratio of
MU of any two goods = Their relative price )
• Alfred Marshall accepts the cardinal approach. He further
believes that the MU of money is constant. This is a highly
controversial assertion but it makes the analysis simpler.

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Consumers' Surplus
• The assumption that consumers maximize utility leads to the
downward-sloping demand curve. Actually, even non-rational or
random behavior will lead to a downward-sloping demand curve, as
economist Gary Becker has demonstrated, but this demand curve
does not have the same interpretation that a demand curve based
on utility maximization (trying to attain goals) has.
• Becker's argument is quite simple. Because the budget line is a
constraint separating what is possible from what is not possible,
even non-rational consumers face a budget constraint. Becker notes
that if people randomly purchase goods, they will be randomly
distributed, either along a budget constraint or within the area
bordered by the budget constraint. (Becker considers both cases.) If
the price of a good increases, the budget line will shift and a new
random distribution of points will occur. The geometry of the
situation implies that, on the average, people will buy less of a good
as its price rises.

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Cont’nd…
• Although the demand curve of non-rational
consumers will slope downward, it can no longer
be interpreted as a locus of points of consumer
equilibrium. With the assumption of utility
maximization, the preferences and prices used
to construct the graph above imply that q2 is the
amount of good A that is optimal for the
consumer. If either more (q3) or less (q1) is
being used, there is an incentive to change
behavior because it would lead to better
fulfillment of goals. However, if behavior is
random and not concerned with fulfilling goals,
point x is as good as point z. Thus, the argument
that price controls have unintended results
depends on the assumption that behavior is
goal-directed.

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Utility Maximization
A Demand Curve
• Utility maximization suggests that the demand
curve, because it measures buyer's willingness
to pay, shows marginal benefits to buyers. Amount People
• The adjacent table indicates that people will buy Price Are
Willing to Buy
only one item if the price is $5.00, or that people
are willing to pay $5.00 for the first item. They
are not willing to pay $5.00 for a second item,
$5.00 1
but only $4.00.
• A second item has a smaller marginal benefit
than the first because of the law of diminishing $4.00 2
marginal utility.
• The equi-marginal principle suggests that as $3.00 3
price gets lower, consumers find that they must
use more of an item to keep equality among $2.00 4
marginal-utility-to-price ratios.
• Alternatively, as people use more of an item, its $1.00 5
marginal utility drops, and so must its price if
they are to stay in equilibrium. $0.50 6

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Value in exchange/Value in use
• This notion of the demand curve has an interesting
implication known as the consumers' surplus. If in the table
above consumers are buying three items, they must pay a
total of $9.00. But the total value to them is $5.00 + $4.00 +
$3.00 = $12.00. There is a surplus value of $3.00.
• In a more intuitive example, suppose that a person has been
working in the hot sun all afternoon and is extremely thirsty.
This person may be willing to pay as much as $2.00 for a can
of cold beer, but if he can buy it for only $.50, he thinks he
has found a good deal and may buy two or three. The
difference between the maximum a person would pay and
the actual amount that he does pay is consumers' surplus. In
other words,
consumers' surplus is the difference between
the value in use of an item and its value in
exchange.
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Paradox of Value
• Notice that consumers' surplus is not related to the type
of surplus that occurs in a market when price is above
market-clearing price. Perhaps economists would have
avoided this possible confusion if they had used a term
other than consumers' surplus for this concept, but they
did not and the term is now well-established.
• Why is it that some items that have relatively little use to
society, such as diamonds, are extremely expensive,
whereas others that are vital, such as water, are
inexpensive? Adam Smith and other economists for a
century after him struggled unsuccessfully to explain this
Paradox of Value. Though Smith never unraveled the
paradox of value, you can do it easily with a little help
from the concept of consumers' surplus.

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Cont’nd…
• To see how this paradox is resolved, consider
again the downward-sloping demand curve
discussed in the last section. As an item grows A Demand Curve
more abundant, its total use value to consumers,
which is the entire area under the demand curve,
rises; but its price, or its marginal value to Price
Amount People Are
Willing to Buy
consumers, declines. Thus, if two items in the table
below are available, the total value to consumers is
$9.00 (or $5.00 for the first and $4.00 for the $5.00 1
second), but the price or value in exchange is only
$4.00. If six are available, total use value rises to $4.00 2
$15.00, but exchange value (price) drops to $.50.
• Smith and his early followers missed this distinction $3.00 3
between marginal and total. Thus, diamonds are
scarce and have a high marginal value but a low $2.00 4
total value. Another pound of diamonds has
valuable uses that are not currently being met. $1.00 5
Water is tremendously abundant and thus has a
high total value and a low marginal value. Another $0.50 6
gallon of water is not particularly important.

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Producers' Surplus
• Suppose that Charles considers a CD worth $10
and Sam, who owns it, values it at only $2.00.
• Sam agrees to sell it to Charles for $5.00. We
have seen that the value Charles gets but that he
does not pay for ($5.00 in our example) is called
consumers' surplus. But what of the $3.00 of
value Sam gets because he sold something
worth only $2.00 to him for $5.00?
There is a surplus here, and it is called either producers'
surplus or economic rent.1 Producers' surplus exists
when actual price exceeds the minimum price sellers will
accept.

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Cont’nd…
• Producers' surplus can appear as profit, but usually it takes a different form.
Suppose, for example, that the price of corn has been $2.00 per bushel for
many years. Then it rises to $3.00 per bushel and stays there. This higher
price will draw more land into corn production, but this change is of no
importance here. What is of interest is what happens to the farmers who
were producing corn at $2.00 per bushel and now find that they can sell
corn at $3.00. It certainly appears that these farmers are better off because
a producers' surplus of $1.00 per bushel has appeared that was not there
before.
• However, let us separate farming into two parts: working the land and
owning the land. Suppose that a farmer does not own the land he works, but
rents it. It then becomes unlikely that this farmer will benefit at all from the
higher price of corn. If those working the land obtained the surplus, there
would be competition for the right to work land that is especially suited to
growing corn. This competition should raise the value of the land, and
therefore it will be the landowners, not the cultivators, who benefit from the
higher price of corn. Because the earliest case of producers' surplus
analyzed was one in which land captured the surplus, the producers' surplus
is often called economic rent.

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Cont’nd…
• Producers' surplus is usually captured by resource owners rather
than by producers. Hence the producers' surplus is not the same as
profit. The resources that capture the surplus are those that are
especially good at producing the product in question or that have no
other uses, and hence will be used for that product even when
prices are low.
• Sometimes the resource that captures economic rent is labor. The
high pay that superstars in many fields earn is mostly producers'
surplus. The basketball star paid $1 million who would still play for
$25,000 earns $975,000 in producers' surplus. There is an
interesting conclusion to this observation: The reason basketball
tickets are high-priced is not because star athletes have high
salaries (as owners sometimes allege), but rather the salaries are
high because fans are willing to pay so much for the tickets to see
the stars play.

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Consumer Surplus/Producer’s Surplus
• The concepts of consumers' and producers'
surpluses are tools that can help analyze many
situations. For example, is there any temptation
for sellers to gang up on buyers? If sellers can
raise the price, can they transfer some of the
consumers' surplus to themselves? They can, and
the graph below illustrates what happens. The
consumers' surplus at price Pc is A+B+D.
• The producers' surplus at this price is C+E. By
raising price to Pm, sellers cause the consumers'
surplus to shrink to the area A. Area B is
transferred from consumers to producers, but
producers lose area E. If area B is greater than
area E, this move benefits producers. The new
producers' surplus is C+B. If sellers gang up on
buyers, they are no longer price takers. Rather,
the sellers leave the supply curve and search
along the demand curve for the best deal. As a
result, such behavior is called "price searching."

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Cont’nd…
• It is easiest for sellers to restrict output and raise price when there are very
few sellers and many buyers. When there is monopoly, which means there
is only one seller, economists expect the seller to act in this way. With many
sellers, coordination of decisions becomes difficult (for the same reason that
the problem of the commons can exist) and output restrictions become
unlikely.
• Alternatively, buyers can gang up on sellers and extract producers' surplus.
They must restrict purchases to drive the price down. Again, this behavior is
likely only when there are very few buyers and many sellers. When there is
only one buyer, a monopsonist, economists expect it to restrict purchases.
• What is good for the individual is not necessarily good for the group. Notice
that the process of transferring the value of area B from consumers to
producers in the second graph above causes consumers to lose area D and
producers to lose area E, and no one gets this lost value. In the process of
increasing their surplus by seizing area B, producers cause the value of
total surplus to shrink. There is a conflict here between the interests of
producers and society as a whole. This loss of value, which is not offset
elsewhere in the system, is the essence of the economist's case against
monopoly.

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Producer and Consumer Surplus
Illustrated
• The producers' and consumers'
surpluses are illustrated with supply and
demand curves in the figure below. The
total value to consumers of quantity Q
is represented by areas A+B+C.
Because the consumers must pay B+C,
only the area A is surplus for them.
Producers get revenue of B+C. B is
their surplus because only payments of
C are needed to attract the resources
necessary to produce quantity Q.

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Engel curve
• An Engel curve describes how a consumer’s purchases of a

good like food varies as the consumer’s total resources such
as income or total expenditures vary. Engel curves may also
depend on demographic variables and other consumer
characteristics. A good’s Engel curve determines its income
elasticity, and hence whether the good is an inferior, normal,
or luxury good. Empirical Engel curves are close to linear for
some goods, and highly nonlinear for others. Engel curves
are used for equivalence scale calculations and related
welfare comparisons, and determine properties of demand
systems such as aggregability and rank.
• In economics, an Engel curve shows how the quantity
demanded of a good or service changes as the consumer's
income level changes. It is named after the 19th century
German statistician Ernst Engel.

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Cont’nd…
• Graphically, the Engel curve is represented in the first-

quadrant of the cartesian coordinate system. Income
is shown on the Y-axis and the quantity demanded for
the selected good or service is shown on the X-axis.
• For normal goods, the Engel curve has an increasing
gradient. That is, as income increases, the quantity
demanded increases. For inferior goods, the Engel
curve has a decreasing gradient. That means that as
the consumer has more income, they will stop buying
the inferior goods because they are able to purchase
better goods. For goods with Marshallian demand
function generated by a utility in Gorman polar form,
the Engel curve has a constant slope.

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Micro Economic Theory & Applications-I Introduction & Demand Analysis

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AMITY BUSINESS SCHOOL (ABS)

Micro Economic Theory &

Wednesday, December Dr Arun Bhadauria, Assistant Prof 1

Wednesday, December Dr Arun Bhadauria, Assistant Prof 5

Wednesday, December Dr Arun Bhadauria, Assistant Prof 7

Wednesday, December Dr Arun Bhadauria, Assistant Prof 12

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• What and how much should be produced?

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Determinants of demand and

Wednesday, December Dr Arun Bhadauria, Assistant Prof 53

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Demand Schedule & Demand Curve

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• elasticity falls as we move from left to right i.e.

Total outlay method or Revenue method

Wednesday, December Dr Arun Bhadauria, Assistant Prof 67

Price Quantity demanded Total outlay

6 45 270 Inelastic (E<1)

Wednesday, December Dr Arun Bhadauria, Assistant Prof 68

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Micro Economic Theory &

Wednesday, December Dr Arun Bhadauria, Assistant Prof 78

Wednesday, December Dr Arun Bhadauria, Assistant Prof 81

AMITY BUSINESS SCHOOL (ABS)

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