1

Consumer Behaviour
Demand and Utility Analysis Indifference Curve Analysis Reveal Preference Theory Game Theory
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Be Nice to the Ones who SMOKE..

Every Cigarette might be their last..

Demand = Desire or Want

+ Willingness to Buy + Ability to Pay

At a specific price and

per unit of time

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Case: 1.
Which of the following statements depicting demand are correct. Give reasons a. In Boregaon village, the total population is one lakh b. 50 buffaloes give 150 litres of milk every day which is consumed by an entire village in one day c. In a bustling part of a city, 100 packets of idlis are sold within an hour d. A fruit vendor sell 50 fruits (of different varieties) in a day e. A toy shop selling different types of toys, each priced at Rs. 20 at a hill station makes a business of Rs. 3500 each day.
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Demand Functions
Long Run function
QDx = f{ Px, Y, Pr, A, T, N, Fe, Tx, O..}
Dependant Variable Independent Variable

Short Run Function QDx = f (Px)

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Demand Determinants
Price of the product demanded. Income of the consumer. Prices of related goods. Advertising expenditure. Future Expectations of the Consumer about the Price of the product. Habits.
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Demand Determinants
Growth of Population, Age structure, Sex ratio etc Direct Taxes Fashion, Tastes, Trends etc Climatic Conditions Credit Facilities Brand Name
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Income of the Consumer Y

Consumers Income

Luxury goods

Normal Goods

Inferior Goods

Essential Consumer goods (ECG)

0
Quantity Demanded

X
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Advertisement Expenditure
Y

Sales Curve

Volume of Sales

X
Advertisement Expenditure (Rs.)
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Case: 2
Following are some instances explain how demand will be affected for that product in specific or in general? Why? a. A firm announces a double bonus for all its employees this Diwali. b. Right next to a busy snack centre, a new one comes up. c. VAT is announced on all saleable commodities d. A vegetable hawker announces that all customers after 9.30pm to his shop will enjoy a 25% off on any good e. An epidemic in a country kills thousands of people, mostly affecting the older generation f. Prices of washing machines go down drastically
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Case: 3 Point out the factors determining the demand for a virus- proof laptop. Or Pen-cum-pendrive
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Individual Demand Schedule of Pizza

Price (Rs) Quantity Demanded by Gautam (In units) 6 5 4 3 2 1
15

100 200 300 400 500 600

Individual Demand Curve of Pizza

Y PRICE P

P
P

DD
O Q Q Q

X
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Quantity Demanded

Demand Curve
Why does a demand curve slope downwards? Price Quantity relationship Law of Diminishing Marginal Utility Income Effect Substitution Effect
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Market Demand Schedule of Pizza

Price QD by (Rs.) Gautam (Smokin Joes) 400 1
300 200 100 2 3 5

QD by QD by Gayatri Jay (Pizza (Dominos) Hut) 3 3

4 5 9 5 7 10

Market demand Or Total Demand

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Market Demand Schedule of Pizza

Price QD by (Rs.) Gautam (Smokin Joes) QD by QD by Gayatri Jay (Pizza (Dominos) Hut) Market Demand Or Total Demand

400
300 200 100

1
2 3 5

3
4 5 9

3
5 7 10

7
11 15 24
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Market Demand
is a horizontal summation of individual demand.

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Law of Demand states that

Other things remaining the same (Ceterius Paribus) the higher the price the lower will be the demand and vice versa. QDx = f {Px}

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Other things remaining the same

No change in consumers income No change in prices of related goods No change in advertising expenditure No change in fashion, tastes, preferences No expectations about future change in price
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Other things remaining the same

No change in age-composition and sex ratio of the population No change in government policy No change in climatic conditions No change in credit facilities, brand name, habits etc
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Exceptions to the Law of Demand

1. Giffen Paradox 2. Prestigious goods or conspicuous consumption or status symbol goods 3. Speculation 4. Consumers ignorance 5. Emergency

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Case: 4
1. With news floating about a possible outbreak of war in the Gulf, what would be the reaction of the people in terms of demand (if for any particular product) and why? 2. Some people only buy branded products. Comment 3. Some people are addicted to few products. Discuss.
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Changes In Quantity Demanded

Expansion in quantity demanded Contraction in quantity demanded.

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Changes In Quantity Demanded

Y
P R I C P E c

P P

a b

DD
o

Q Q

X
QUANTITY DEMANDED
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Changes

in Demand

Increase in demand Decrease in demand

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Increase in Demand
Y
P R I C E

P
DD

DD
Q

X QUANTITY DEMANDED
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Increase in Demand Can be Due to -----Increase in Income of Consumer Taste, Fashion in favor of The Products Increase in Price of Substitute Decrease in price of Complementary Consumers Ignorance Emergency Future Expectations About Rise in Price Increase in population
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Decrease in Demand
Y
P R I C E

P
DD

DD
Q

X
Q

QUANTITY DEMANDED
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Decrease in Demand Can be Due to -----Decrease in Income of Consumer Taste, Fashion Against The Products Decrease in Price of Substitute Increase in price of Complementary Future Expectations About Fall in Price Decrease in Population etc etc..
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Case: 5
1. A farmer gets a bumper crop this season and makes a lot of money. He goes to the market and buys a lot of things for his family. This is expansion of demand Justify. 2. Making door-to-door calls for the product Tide washing power has brought in lot of orders for the product. How is the demand behaving? Explain. 33

Case: 6
Given the following features, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for housing. An increase in housing prices. A fall in interest rates on Home loan A rise in interest rates on Home loan A severe economic recession 34 A robust economic expansion

a) b) c) d) e)

MISTAKES ARE NEW LESSONS FOR SUCCESS

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Elasticity of Demand
The degree of responsiveness of quantity demanded due to change in any factor affecting demand. Percentage change in quantity demanded Ep= ------------------------------------------------Percentage change in any factor affecting demand
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Price elasticity
Percentage change in quantity demanded Ep= ------------------------------------------------Percentage change in price

QDx = f (Px)
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Income Elasticity
Percentage change in quantity demanded

ei=-----------------------------------------------------Percentage change in the Income of consumer

QD = f (Y)
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Cross Elasticity
Percentage change in Quantity demanded of good X
Exy = Percentage change in price of good Y

QDX = f

(PY)
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Price elasticity
The degree of responsiveness of quantity demanded due to change in price. Percentage change in quantity demanded Ep= ------------------------------------------------Percentage change in price
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Method of Price Elasticity

Ratio or Percentage Method

eP =
.

Q P

P Q P1
X

. .

eP =

Q2 - Q1 P2 - P1

Q1

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Ratio or Percentage Method

Where, P1 = Initial Price P2 = New Price Q1 = Initial Quantity Q2 = New Quantity

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Types of Price Elasticity

1. 2. 3. 4. Perfectly elastic (ep = ) Perfectly inelastic (ep = 0 ) Relatively elastic demand (ep > 1) Relatively inelastic demand (ep< 1) 5. Unitary elastic demand (ep = 1)
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1. Perfectly elastic (ep=)

Y P R

I
C E

Q
= Q
P

DD

X
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QUANTITY DEMANDED

2. Perfectly inelastic (ep=0)

Y

P R
I C E P

DD

Q
= Q

X QUANTITY DEMANDED
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3. Relatively elastic demand (ep > 1) Luxury goods

P R Y

I
C E P

Q
Q P
P

>
DD

P
P

Q
o Q

Q QUANTITY DEMANDED

X
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4. Relatively inelastic demand (Ep < 1) Necessary Goods

Y P R I C E P

DD

Q
Q

<

P
P

P
P Q 0 Q Q X QUANTITY DEMANDED
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5. Unitary elastic demand (ep = 1)

P R Y

I
C E P

Q
Q P
P

P
P

Q
Q Q

DD X QUANTITY DEMANDED
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Case: 7
When the price of Tea is Rs 20, Janak purchases 10 Kgs. When the price of Tea increases to Rs 22 now he purchases 9 Kgs. Find elasticity.

Answer : Ep = 1

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Case: 10
Suppose that Business travelers and Vacationers have the following demand for airline tickets from Mumbai to Delhi. As the price of the tickets rise from Rs. 2000 to Rs. 2500, what is the price elasticity of demand for the business travelers and vacationers? And why might vacationers have different elasticity than business travelers?
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Case: 10 conti.
Price (Rs) Quantity DDed Quantity (Busi. Travelers) DDed (Vacationers)

1500 2000

2100 2000

1000 800

2500 3000

1900 1800

600 400
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Case: 10 Answer
Business travelers Vacationers Ep = 0.2 Ep = 1

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Method of Price Elasticity

Y

Point Method or Geometric Method

A ep=

ep=
ep>1
C

Lower Segment
Upper Segment

Price

ep=1
F

ep<1
G

0 Quantity Demanded

ep=0 B

X
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Method of Price Elasticity

ARC Method

ep =

Q2 + Q1 P P2 + P1

2
X P2 + P1

ep =

Q2 Q1 P2 P1

Q2 + Q1

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Method of Price Elasticity

Y

Price

Arc a b
DD X Quantity Demanded
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Method of Calculating Price Elasticity: Total Revenue or Total Expenditure or Total Outlay Method

Total Revenue = Price x Quantity

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Total Revenue/Total Expenditure/ Total Outlay Method-More elastic

Price

P TR
DD

P
a

TR

P P P

b C

Q Q Q Quantity Demanded

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Total Revenue/Total Expenditure/ Total Outlay Method-less elastic

Price DD

P TR P TR
a b

P P P

Q Q Q

Quantity Demanded

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Total Revenue/Total Expenditure/ Total Outlay Method-Unitary elastic

Price DD

P P

a
b

Q Q

Quantity Demanded

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Total Revenue Method

Type of Elasticity (Ep) Ep = 1 Price (Rs)
2 4 1 2 4 1 2 4 1

QDD (in units)

10 5 20 10 4 24 10 6 16

TR (in Rs.)
20 20 20 20 16 24 20 24 16

Ep > 1

EP < 1

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Total Revenue Method

Price Total Revenue (TR) Constant Constant Decrease Increase Type of Elasticity (Ep) E=1 (Unitary) E>1 (More elastic)

Increase Decrease Increase Decrease

Increase Decrease

Increase Decrease

E<1 (Less elastic) 61

Case: 11
The Serpell Report (1983) on Railway finances in England, for instances, measured price elasticity of demand for rail services on some routes to be fairly inelastic (-0.15); hence suggested fares rise of 40 per cent for London commuters. In this case, work out the revenue effect if fare is raised from pound 10 to pound 14 and daily 1000 passengers are traveling on this route. Should the authorities accept this suggestion? Give your comment.
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Case: 11 Answer
% Q Q Ep = _________ = -0.15 = _________ % P 40% Therefore, Q = 6% as TR = P X Q Initially, TR = 10 X 1000 = Pound 10,000 Q = 6%
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Case: 11 cont.
Therefore, with the rise in fare new Q = 940 At the new price Pound 14 TR = 14 X 940 = pound 13,160 Price Qty TR

10

1000

10,000

14

940

13,160

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Case: 12
Suppose the demand for insulin consists of two types of consumers, those who must have a dose each day and those who are able to go without the drug for several weeks. Suppose the price elasticity of demand for the first group is 0.01 and that for the second group is 4.0. Explain how the firms producing insulin might price the insulin.
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Factors influencing elasticity of demand(1) Nature of the commodity :

Necessaries Comforts and Luxuries

(2) Availability of substitutes :

No substitutes Close substitutes
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Factors influencing elasticity of demand(3) Number of Uses : Single Use Multi Use (4) Range of Price Change: Highly Priced Low Priced
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Factors influencing elasticity of demand(5)Proportion of Expenditure : Less expenditure More expenditure (6)Time Period : Short Period Long Period
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Factors influencing elasticity of demand(7) Possibility of Postponement : Can be Postpone -Cannot be Postpone

(8)Influence by Habits & Customs

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Factors influencing elasticity of demand(1) Nature of the commodity :

Necessaries Inelastic Comforts and Luxuries Elastic

(2) Availability of substitutes :

No substitutes Inelastic Close substitutes Elastic
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Factors influencing elasticity of demand(3) Number of Uses : Single Use Inelastic Multi Use Elastic (4) Range of Price Change: Highly Priced Elastic Low Priced Inelastic
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Factors influencing elasticity of demand(5)Proportion of Expenditure : Less expenditure Inelastic More expenditure Elastic (6)Time Period : Short Period Inelastic Long Period elastic
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Factors influencing elasticity of demand(7) Possibility of Postponement : Can be Postpone -- Elastic Cannot be Postpone Inelastic

(8)Influence by Habits & Customs Inelastic

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Practical Applications of Price elasticity

1. To a Businessman By knowing the type of elasticity of demand it is easy to know whether a price cut is better or a price rise for increasing the sales, total revenue and the profits. If the demand is more elastic, a price cut would lead to an increase in total revenue. It the demand is inelastic, by raising a price, no significant decrease in sales will be effected so the total revenue and the 74 profit would rise.

Case : 9
Just think of the product Mangoes. It a.Is a perishable commodity b.Has no substitute c.Has a high demand in the domestic as well as the foreign market -- what can you say about its demand elasticity in each of the above aspects?
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Practical Applications of Price elasticity

2. To the Finance Minister Finance minister has to consider the elasticity of demand while selecting commodities for tax. Tax imposition on commodities for getting substantial revenue becomes worthwhile only if the taxed goods have an inelastic demand. Taxes are levied on commodities which has inelastic demand like cigarettes, wine, sugar etc.
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Practical Applications of Price elasticity

3. In International Trade Elasticity is important in formulating export and import policies of a country. The relative elasticities of demand for commodities in the two countries are very important. Export those commodities which are inelastic in the international market.
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Practical Applications of Price elasticity

4. To Trade Unionists The concept of price elasticity is useful to trade unions in wage bargaining. The union leaders, when they find that demands for their industrys product is fairly elastic, will ask for a higher wage to workers and use the producer to cut the price and increase sales which will compensate for his loss in total profit. 78

Case: 13
Rainbow Crayons, Inc. as a marketing specialist has just hired you. The CEO comes to you for advice on how to raise revenue. She wants to know if the company should lower product prices or raise product prices to increase revenue. What information must you know? If you have this information, what do you advise?
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Case: 14 Calculate the price elasticity of demand for different years from the following data
Year Percentage change in price 5.0 -2.5 zero Percentage change in quantity -3.2 5.6 1.2

2001 2002 2003

2004

6.5

-2.5
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Case: 14 Answer
2001 0.64 Relatively inelastic. 2002 2.24 Relatively elastic 2003 infinity Perfectly elastic. 2004 -- 0.38 Relatively inelastic.

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Income Elasticity
the degree of responsiveness of the quantity demanded due to the change in income of the consumer.

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Measurement of Income Elasticity

Percentage change in quantity demanded

ei=-----------------------------------------------------Percentage change in the Income of consumer

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Measurement of Income Elasticity Ratio Method

ei=
Q Y

Y Q

ei =

Q2 - Q1

Y1

Y2 - Y1

Q1

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Measurement of Income Elasticity

Where, Y1 = Initial Income Y2 = New Income Q1 = Initial Quantity Q2 = New Quantity

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Mesurement of Income Elasticity

ARC Method

ei =

Q2 + Q1 Y Y2 + Y1

2
X Y2 + Y1

ei =

Q2 Q1 Y2 Y1

Q2 + Q1

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Types of Income elasticity

(1)Positive income elasticity can be : Greater than one ei > 1 Luxuries Less than one ei < 1 Necessaries
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Positive Income Elasticity

Y DD

ei < 1 (necessary goods)

Y

Y
Y

Q
0 QQ X QUANTITY DEMANDED
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Positive Income Elasticity

Y

ei > 1 (Luxury goods)

DD Y Y

Q
0 Q Q QUANTITY DEMANDED X
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Negative Income Elasticity

Y DD I N C Y O M E Y

ei < 0 (Inferior goods)

Q
0 Q Q QUANTITY DEMANDED X
90

Case: 15
Paul purchases 10 Kgs per month on sugar when his income is Rs 1500/- per month, when his income increases to Rs 1800/- per month he spends 12 Kgs on sugar .Find Income elasticity. Answer: ei = 1 (sugar is a normal good)
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Case: 16
Find income elasticity from the following information and interpret the result. Initial Income = Rs. 3000 Initial Quantity = 1600 units New Income = Rs. 3200 New Quantity = 1300 units Answer: Ey = -2.81( it is an inferior good) 92

Case: 17
There are three income bracket people, very poor, middle class and elite class. In one particular month the prices of each of these rise. What will be the income elasticity? Potatoes Diamonds Cotton Paper Wheat
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Practical Applications of Income elasticity

K. K. Seo points out the income elasticity of demand is applicable to many planning and strategy problems, such as 1. Long term Business Planning In the long run, demand for comforts and luxury goods may tend to be highly income elastic. Hence, prospects for long run growth in sales for these goods are very bright. The firm can plan out its business accordingly.
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Practical Applications of Income elasticity

2. Market Strategy Income elasticity of demand is helpful in developing market strategies. 3. Housing Development Strategies On the basis of income elasticity, housing development requirement can be predicted and construction work can be effectively launched 95 upon.

Practical Applications of Income elasticity

4. To the Businessman Income elasticity is important to certain producers in their demand and sales forecasting and planning business expansion. For instance, the demand for TV sets is highly income elastic, so when per capital income or income levels of a class of consumers is found to be rising, TV manufacturers can expect a greater sale even at slightly higher prices.
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Cross Elasticity
..is the degree of responsiveness of quantity demanded of good X due to the change in Price of good Y( where good X and Y are either substitutes or complementary)
Percentage change in Quantity demanded of good X Percentage change in price of good Y
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Exy =

Measurement of Cross Elasticity

Ratio Method

ey =

QX PY

PY QX

ey =

QX2 - QX1

PY1

PY2 - PY1

QX1

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Mesurement of Cross Elasticity

ARC Method QX QX2 + QX1 PY PY2 + PY1 2

ey =

2
X PY2 + PY1

ey =

QX2 QX1 PY2 PY1

QX2 + QX1

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Price of coffee

Cross elasticity in case of Substitutes Y

DD Tea

Exy > 0

P P

X Demand for tea

100

Cross elasticity in case of Complementary goods

Y Price of petrol

Exy < 0

P P

DD Vehicles
Q X Demand for vehicles
101

Cross elasticity in case of Unrelated goods

Y Price of Ice cream DD Cloths

Exy = 0

P P P

X Demand for Cloths

102

Practical Applications of Cross elasticity

To determine the competitive price strategy and policy in the alternative rivals modes of services such as rail-road services. Cross elasticity, here is taken, as a measure of the effect of a change in the fares on the demand for the rail service and vice versa.
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Case: 18 Calculate cross elasticity and interpret results

Instances Price of Good X 10 20 02 03 04 15 10 8 20 20 Qty demanded of Good Y 100 200 150 150 100 0 100 Results

01

15

50

104

Case: 18 Calculate cross elasticity and interpret results

Instances Price of Good X 10 20 02 03 04 15 10 8 20 20 Qty demanded of Good Y 100 200 150 150 100 0 100 Results

01

Exy = 1 Substitutes Exy = 0 Unrelated Exy = -0.66 Complementary Exy = 2

15

50

Substitutes

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Case: 19
There was a sale of 10,000 units of Acer Laptop in the year 2004 when its price was Rs. 40,000. During the same period 10,500 Toshiba Laptop were at the price of Rs. 45,000. when the price of Acer was brought down to Rs. 38,000 its sales increased to 12,000 units and the demand for Toshiba declined to 9,500 units without the change in its own price. Calculate cross elasticity and interpret your 106 result.

Case: 19 Answer Exy = 1.90 (Subsitutes)

107

Case: 20
When the price of bread was Rs. 20, the demand for bread for 80 units. During the same time price of butter was Rs. 75 and demand for butter was 30 units. Price of bread remaining same, if the Price for butter reduces to Rs. 60, then its demand increases to 40 units and demand for bread also increases to 90 units. Answer: Exy = - 0.625 (Complementary goods)

108

Case: 21. Weekly demand of the Household is given below. Find the price elasticity of demand for rice and cross elasticity of demand between rice and wheat. Original price (Rs) Original Quty (Kgs) New Price (Rs) 8 New Quty (Kgs)

Wheat 8

50

70

Rice 20

50

23

40
109

Case: 21 Answer Ep= 1.33,

Exy = 2.66 (Substitutes)

110

Case: 22
The Times of lndia, is one of the leading newspapers in India. In September 1972, it lowered its price from 45 paise to 30 paise while prices of its rivals remained unchanged. The number of newspapers sold by TOI and its rivals was as follows :

111

Case: 22 conti..
August 2005 Times of India 3,55,000 May 2006 5,18,000

Statesman
Hindu Hindustan Times

10,24,000
3,92,000 3,25,000

9,93,000
4,02,000 2,77,000
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Case: 22 conti..
1. Based on the figures, find the price elasticity of demand for TOI. 2. Was the cross elasticity of demand between Statesman and TOI positive or negative ?
113

Case: 23 Work out the type of elasticity the following products will have: Electricity Soaps Exotic Vacations Cigarettes Wine AC Tea
114

Genius does what it must, and Talent does what it can

115

Demand Forecasting
Is the method of predicting the future demand of a firms product.

116

Demand Forecasting
Short Run Forecasting Survey Method Long Run Forecasting Statistical Method

Survey Method Opinion Polling Method Collective opinion Method Panel of Experts

Correlation & Regression Time Series Method Barometric Method

117

Methods of Demand Forecasting

For a Established product : (1) Interview and Survey Approach (2)Opinion Polling Method (3)Collective Opinion Method (4) Panel of Experts Or Delphi method. (5) Projection Approach (for Long Period)

118

Projection Approach (Long Period)

Y

SALES

YEAR

X
119

For a New Product

Evolutionary Method Substitution Method Growth Pattern Method Opinion Polling Method Sample Survey Method

120

Case: 24
Mention which method of forecasting will be suitable for the following products: a. Toys b. Getz c. Washing Powder d. Coffee
121

Case: 25
A cartel has been entered into by various firms into the manufacture of kids school shoes. Price has been set, which the firms have to respect. To increase profits, the firms have to increase the quantity supplied. Your firm is one of them. It is the month of April. Just 2 more months to go for the schools to re-open, the time when most parents do shoe-shopping for their children. Certain factors are in your hands, while some are not. Which ones do you think are the ones in your control, 122 which you can affect. Give reasons