7

CHAPTER-2

CONSUMER BEHAVIOUR

I Choose the correct answer

1. Utility is

a) Objective c) Active
b) Subjective d) Passive
Ans: (b) Subjective
2. When TU is constant MU becomes
a) Zero b) Maximum c) Negative d) Positive
Ans: Zero
3. Ordinal utility analysis expresses utility in
a) Numbers c) Ranks
b) Returns d) awards
Ans: (c) Ranks
4. The shape of an Indifference curve is normally
a) Convex to the origin c) Horizontal
b) Concave to the origin d) Vertical
Ans: (a) Convex to the origin
5. The consumption bundle that are available to the consumer’s income depend on
a) Colour and shape c) Income and quality
b) Price and income d) Price and Income
Ans: (b) Price and income
6. The equation of Budget line is
a) Px+p1 x1 =M c) P1 X1 +P2 X 2 =M
b) M=P0 X0 +Px d) Y=Mx+C
Ans: c) P1 X1 +P2 X2 =M
7. The demand for these goods increases as income of the consumer increases
a) Inferior goods c) Normal goods
b) Giffen goods d) None of the above
Ans: (c) Normal goods
8. A vertical demand curve represents
a) Perfectly elastic c) Unitary elastic
b) Perfectly inelastic d) None of the above
Ans: (b) Perfectly inelastic
9. At the midpoint of the demand curve, the elasticity is
a) Equal to one b) Less than one c) More than one d) Equal to zero
Ans: a) Equal to one
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10. The value of Elasticity of demand at different points on a linear demand curve lies between
a) 0 and ∞ b) 1 and 10 c) 10 and 100 d) 5 and 10
Ans: a) 0 and ∞
II Fill in the blanks
1. Wants satisfying capacity of a commodity is ……………….
Ans: Utility
2. Two indifference curves never ............................each other.
Ans: Intersect
3. As the consumer’s income increases, the demand curve for inferior goods shifts
towards………………….
Ans: Leftwards
4. The demand for a good moves in the ............... direction of its price.
Ans: Opposite
5. Method of adding two individual demand curves is called as……………………
Ans: Horizontal summation

III Match the following

A B

1. Demand curve a) D(p)=a-bp

2. Linear Demand curve b) Downward sloping
3. Unitary elasticity of demand c) Pen and ink
4. Complementary goods d) A family of Indifference curve
5. Indifference map e) |ed|=1

Ans: 1-b; 2-a; 3-e; 4-c; 5-d;

IV Answer the following questions in a sentence or a word

1. Give the meaning of marginal utility.
Ans: It is the additional utility derived by the consumer by consuming additional unit of a
commodity. It represents the utility of single unit.

2. Suppose, to a consumer- 4 oranges give 28 units of Total utility and 5 oranges give 30 units of
total utility, calculate the Marginal Utility?
Ans: MU = ΔTU/ΔQ , ΔTU = 30-28 = 2; ΔQ = 5-4=1; then,
Marginal Utility is MU = 2/1 = 2.
3. What is budget line?
Ans: The line which consists of all bundles of goods cost exactly equal to the money income of
consumer is called budget line.
4. MRS- Expand
Ans: Marginal Rate of Substitution.
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5. What do you mean by indifference curve?

Ans: Indifference curve shows the different combinations of two goods in which the consumer
gets equal level of satisfaction.
6. What is demand?
Ans: The concept ‘demand’ refers to the quantity of a good or service that a consumer is willing
and able to purchase at various prices, during a period of time.
7. Give the meaning of Demand Function.
Ans: The relation between the consumer’s optimal choice of the quantity of a good and its price is called
the demand function.
8. If the demand curves of two consumers are d 1 (p) =10-p and d 2 (p) =15-p respectively, Find out
the Market demand.
Ans: The Market Demand is obtained by adding the two individual demand equations i.e., d 1 (p)
+ d 2 (p) = 10-p + 15-p = 25 – 2p, therefore dm=25-2p.

V Answer the following in 4 sentences

1. Mention two different approaches which explain consumer behavior.
Ans:
a) Cardinal Utility Analysis
b) Ordinal Utility Analysis
2. What is monotonic preference?
Ans: Monotonic preferences imply that between any two indifference curves, the bundles on the one
which lies above are preferred to the bundles on the one which lies below .
Here the consumer will not remain indifferent between two combinations of commodities when
he has an opportunity to have more quantity in one combination than the other.
3. What are the differences between budget line and budget set?

Budget Line Budget Set

• It represents different combinations of • It is a collection of all bundles

two goods which the consumer available to a consumer at the
consumes and whose prices are existing price at his given level of
exactly equal to his income. income.
• It is also known as Price line. • It is also known as opportunity set

4. List out the factors that determine the optimal choice of a consumer.
Ans: The factors which determine the optimal choice of a consumer are :
a) The price of the goods itself,
b) The prices of other goods,
c) The consumer’s income and
d) The tastes and preferences of consumer.
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5. Name the two effects that explain the negative slope of the demand curve.
Ans:
a) Income Effect b) Substitution Effect
6. State the law of demand?
Ans: The law of demand states that, when price of the commodity increases, demand for
it falls and when price of the commodity decreases, demand for it rises, other factors remaining
the constant.
There is inverse or opposite relationship between Price and quantities demanded.
7. What do you mean by inferior goods? Give example.
Ans: The inferior goods are those goods for which the demand falls with the increase in income
of consumer. Here demand for such goods move in the opposite direction of the income of the
consumer. That is, there will be a negative relationship between income of consumer and
demand for inferior goods. Example: Low quality goods.
8. What do you mean by price elasticity of demand? Write its formula.
Ans: Price elasticity of demand is a measure of the responsiveness of the demand for a good to
changes in its price.
It is measured by using the following formula.
PED = Percentage change in demand for the good
Percentage change in price of the good
PED = ΔQ/ ΔP x P/Q

9. Mention any two types of Price Elasticity of Demand.

Ans:
a) Perfectly Elastic Demand, b) Perfectly inelastic Demand,
b) Unitary Elastic Demand.
10. Write any two factors that determine Price Elasticity of Demand for a good.
Ans: a) Nature of goods b) Availability of substitutes
11. Suppose the Price Elasticity of Demand for a good is -0.2, how will the expenditure on the good
be affected if there is a 10% increase in the price of the good?
Ans:
Price Elasticity of Demand for a good : -0.2
Percentage change in price : 10%
Now the expenditure on the good will be
PED = Percentage change in quantity demanded (Qd)
Percentage change in price
-0.2 = Percentage change in quantity demanded
10
Now the percentage change in Qd = -0.2x10 = -2. (cross multiply). Here the elasticity of demand is
less than the change in price i.e., |Ed|<1 and it is less elastic. So the expenditure on the good
increases.
(Total Expenditure = Price x Quantity = 10 x 2 = 20. The total Expenditure will increase by 20%)
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VI Answer the following questions in 12 sentences

1. Write the differences between total utility and marginal utility.

Total Utility Marginal Utility

• It is the aggregate utility derived by the • It is the additional utility derived by

consumer by consuming all the units. the consumer by consuming
• It represents utility of all the units additional unit
consumed. • It represents the utility of single unit.
• It may be symbolically written as • It may be written as
TUn=U 1 +U2 +U 3 +U4..................... Un. MUn =TUn -TUn-1 or MU = ΔTU/ΔQ
• The slope of TU curve increases in the • The slope of MU decreases from the
beginning, reaches maximum and later beginning, reaches zero and becomes
decreases.. negative later.
2. Explain the indifference map with the diagram.
Ans: A family of indifference curves is called as indifference map. It refers to a set of indifference
curves for two commodities showing different levels of satisfaction. The higher indifference curves
show higher level of satisfaction and lower Indifference Curve represent lower satisfaction. A
rational consumer always chooses more of that product that offers him a higher level of satisfaction
which is represented in higher Indifference Curve. It is also called ‘Monotonic preferences’.
The consumer’s preferences over all the bundles can be represented by a family of indifference
curves as shown in the following diagram.

Y
Mango

IC3
IC2
IC1
O Banana X
In the above diagram, we see the group of three indifference curves IC 1 , IC2 and IC3 ,
showing different levels of satisfaction to the consumer. The IC 1 shows lower level of
satisfaction and IC 3 represents Higher level of satisfaction and the arrow indicates that
the bundles on higher indifference curves are preferred by the consumer to the bundles on
lower indifference curves.
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3. Briefly explain the budget set with the help of a diagram.

Ans: The budget set is the collection of products that the consumer can buy with his income at the
prevailing market prices. The Budget set is also known as opportunity set. It includes all the bundles
(all possible combination of two goods) which the consumer can purchase with his given level of
income.
The budget equation can be written as follows:
P1 X1 + P2 X2 ≤ M.
Consider, for example, a consumer who has Rs.20 and suppose, both the goods are priced at Rs.5
and are available only in integral units. The bundles that this consumer can afford to buy are; (0,0),
(0,1), (0,2), (0,3), (0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1) and (4,0).
Among these bundles, (0,4), (1,3), (2,0), (2,2), (3,1) and (4,0) cost exactly Rs.20 and all the
other bundles cost less than Rs.20.
If both the goods are perfectly divisible, the consumer’s budget set would cosist of all bundles
(x1 ,x2 ) such that x1 and x2 are any numbers greater than or equal to 0 and P 1 X1 + P2 X 2 ≤ M.
The budget set can be represented in a diagram as follows:
Y

Mangoes

M/P2

P1 X1 + P2 X2 =M.

O Banana M/P1 X

Quantity of bananas is measured along the horizontal axis and quantity of mangoes is measured
along the vertical axis. Any point in the diagram represents a bundle of the two goods. The budget
set consists of all points on or below the straight line having the equation P 1 X 1 + P2 X2 =M.

4. Present the derivation of slope of the budget line.

Ans: The slope of the budget line measures the quantity of change in one product required per unit of
change in another product along the budget line.
For example, the amount of change in mangoes required per unit of change in bananas along the
budget line is the derivation of slope of the budget line. It can be represented in diagram as follows:
 13

M/P2

(x1 ,x2 )

Mangoes ∆x2

(x1 + ∆x1 , x2 +∆x2 )

∆x1
O Banana M/P1 X

The absolute value of the slope of the budget line measures the rate at which the consumer is
able to substitute bananas for mangoes when she spends her entire budget.
Let us consider two points (x1 ,x2 ) and (x1 + ∆x1 , x2 +∆x2 ) on the budget line. It will be as
follows:

P1 X1 + P2 X2 =M… ................ (1)

P1 (x1 + ∆x1 ) + P2 ( x2 +∆x2 ) = M
P1 x1 + P1 ∆x1 + P2 x2 +P2 ∆x2 = M ...............(2)
Now subtracting (1) from (2), we get

P1 ∆x1 + P2 ∆x2 =0
P2 ∆x2 = - P1 ∆x1 ......................... (3)
By rearranging terms in (3) we get

∆x2 /∆x1 = -P1 /P2...........................(4).

Therefore, the slope of the budget line is -P1 /P2. That means, the Indifference curve is negatively
sloped i.e., it slopes downwards. An increase in the amount of bananas along the indifference curve is
associated with a decrease in the amount of mangoes.
 14

5. List out the differences between normal and inferior goods with examples.
Ans:
Normal goods Inferior goods

• These are the goods for which the • These are the goods for which the
demand increases with the increase demand decreases with the increase
in the income of consumer. in the income of consumer.
• Example for normal goods are • Example for inferior goods are low
food, cloths, electronic goods, quality of goods like unbranded
luxury goods etc. products.
• There is positive relationship • There is inverse relationship
between income and demand. between income and demand.
• Here the demand curve shifts • Here the demand curve shifts
towards right if the income of towards left if the income of
consumer increases. consumer increases.

6. Write the differences between substitutes and complements.

Ans:
Substitute goods Complementary goods

• These are alternative goods available • These are the goods which are
to satisfy our wants. consumed together.
• If the price of a product increases, the • If the price of a product increases, the
demand for its substitute also demand for its complementary good
increases. decreases.
• Example for substitute goods are Tea • Example for complementary goods are
and Coffee, Colgate and Pepsodant, Pen and Ink, Shoes and socks etc
etc. • Here the demand curve shifts to left in
• Here the demand curve shifts to the case of price rise.
right in case of price rise. • Price and demand move in opposite
• Price and demand move in same directions.
direction.

7. Suppose an individual buys 15 Apples at the price Rs.5 per Apple and if the price increases
to Rs.7 per apple, she reduces her demand to 12 apples. Find out the Price elasticity of
demand.
Ans:
PED = Percentage change in quantity demanded (ΔQ/Q x 100)
Percentage change in price (ΔP/P x 100)
Price per Apple Quantity Demanded
Old Price P1 = 5 Old quantity Q 1 = 15
New Price P2 = 7 New Demand Q2 = 12
 15

Percentage change in Quantity Demanded:

ΔQ/Q x 100 = Q2 – Q1 X 100 = 12 – 15 X 100 = -3/15 x100 = -0.2x100 = -20
Q1 15
Percentage change in Price:
ΔP/P x 100 = P2 – P1 X 100 = 7 – 5 X 100 = 2/5 x100 = 0.4x100 = 40
P1 5
Now the Price Elasticity of Demand (PED) will be
PED = -20/40 = - 0.5
The demand for apple is not very responsive to its change in price.
8. Consider a market where there are just two consumers and their demand for the goods
at different price levels is given as follows: Calculate the market demand for the good.
P D1 D2 Market
Demand
1 9 24
2 8 20
3 7 18
4 6 16
5 5 14
6 4 12
7 3 10
8 2 8

Ans: We get Market Demand by adding D1 and D2

P D1 D2 Market
Demand
1 9 24 33
2 8 20 28
3 7 18 25
4 6 16 22
5 5 14 19
6 4 12 16
7 3 10 13
8 2 8 10
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IV Answer the following questions in 20 sentences

1. Explain the law of diminishing marginal utility with the help of a table and diagram.
The Law is one of the important laws of cardinal utility analysis it is introduced by German Economist H.
H. Goosen and it is popularized by Professor Alfred Marshall.
The Law of Diminishing Marginal Utility States that as we go an consuming a particular product
one after the other without any time gap, the marginal utility derived by each successive
commodity goes on decreasing.
A consumer has a good Banana the utility which he derives when he consumes the first banana will
be more than the consumption of second banana which gives him less utility when compared to
first banana and the same in third banana still lesser and so on.

Units TU MU
Apples
1 12 12

2 18 6

3 22 4

4 24 2

5 24 0
6 22 -2

In the above diagram the ox axis represents number of banans consumed and oy axis represents utility
derived.

When the consumer consumes first unit of banana he gets total utility of 12 and marginal utility of
12 units but after consuming second and third banana he get less utility and when total utility reaches the
maximum marginal utility becomes zero then total utility starts decreasing when marginal utility
becomes negative.
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2.Illustrate the features of Indifference curves with the help of diagrams.

Ans: The main features of Indifference curves are as follows:
a) Indifference curve slopes downwards from left to right: An indifference curve slopes downwards
from left to right because, the consumer, in order to have more of units of one commodity, he has to
forego some units of other commodity. This can be explained with the help of diagram.
Y

Mangoes

(X1 , X2 )

∆X 2

(X 1 + ∆X1 , X2 +∆X 2 )

∆X1 IC

O Banana X

Thus, according to above diagram, as long as the consumer is on the same indifference curve, an
increase in bananas (∆X 1 ) must be compensated by a fall in quantity of mangoes (∆X 2 ). That
means, an increase in the amount of bananas along the indifference curve is always associated
with a decrease in the amount of mangoes.
b) Higher indifference curve gives greater level of utility: As long as marginal utility of a
commodity is positive, a consumer always prefers more of that commodity to increase his level
of satisfaction. This can be explained with the help of table and a diagram:
Combination Banana Mango

A 1 10

B 2 10

C 3 10

Y
Mango

10 A B C
IC3

IC2
IC1
O 1 2 3 Banana X
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Let us consider the different combinations of two goods- bananas and mangoes- A, B and C in
the above table and diagram. All the three combinations consist of same quantity of mangoes but
different quantities of bananas. As combination B has more bananas than A, B will provide the
consumer higher level of satisfaction than A. Therefore, B will lie on higher indifference curve.
Similarly, C has more bananas than B and therefore C will provide higher level of satisfaction than B
and it also lies on higher indifference curve than B.
Thus higher indifference curves give greater level of utility.
c) Two indifference curves never intersect each other: The two indifference curves never intersect
with each other. This is because, if the two indifference curves intersect each other, they will give
conflicting results. This can be explained with the help of diagram.

Mango

B IC2

C IC1
O Banana X

In the above diagram the two indifference curves have intersected with each other at point A. As
points A and B lie on IC 2 , utilities derived from A and B are same. Similarly, as points A and C lie on
the same indifference curve IC1 , the utilities are same. From this, it follows that utility from points B and
C are same. But this is clearly an absurd result as on B, the consumer gets a greater number of mangoes
with the same quantity of bananas. So the consumer is better off at point B than at Point C. Thus, it is
clear that intersecting indifference curves will lead to conflicting results. Thus, two indifference curves
cannot intersect each other.

2. Elucidate the changes in Budget set with the help of diagrams.

The availability of combination of goods to the consumer depends on the prices of the two
goods and the income of the consumer. If the consumer’s income changes, the set of available bundles
is also likely to change. When the price of either of the goods change, the availability of goods to the
consumer also gets changed.
 19

I Change in the income of consumer:

Suppose the consumer’s income changes from M to M′ but the prices of the two goods remain unchanged. With the new
income, the consumer can afford to buy all bundles (X 1 , X 2 ) such that P1 X 1 + P2 X2 ≤ M′.

With the change in income, the new equation of the budget line is P1 X1 +
P2 X 2 = M′. The slope of the new budget line will be same as the slope of the budget line prior to the
change in the consumer’s income. However, the vertical intercept will be changed after the change in
income. If the income increases, i.e., M' > M the consumer can buy more of the goods at the prevailing
market prices and there will be outward shift in Budget line. Similarly, if the income goes down, i.e. if
M' < M, both intercepts decrease, and hence, there is a parallel inward shift of the budget line. This can
be represented in the following diagrams: M/P2

M’/P1 (a) M/P2 (b)

M/P2 M’/P2

Mango Mangoes

O Banana M/P1 M’/P1 M’/P1 M/P1 Banana

The above diagrams show the changes in the set of available bundles of goods resulting from changes in
the consumer’s income. An increase in income causes a parallel outward shift of the budget line as in
diagram (a) and a decrease in income causes a parallel inward shift of the budget line as in diagram (b).
II Change in the price of goods:
If the price of bananas changes from P 1 to P'1 but the price of mangoes and the consumer’s
income remain same, at the new price of bananas, the consumer can afford to buy all bundles (X1 ,X2 )
such that P'1 X1 + P2 X2 ≤ M. The equation of the budget line is P' 1 X1 + P2 X2 = M
Suppose, the price of bananas decreases, i.e P' 1 < P1 , the absolute value of the slope of the
budget line decreases and hence, the budget line becomes flatter. The following diagrams show the
change in the budget set when the price of only one commodity changes while the price of the other
commodity as well as income of the consumer are constant
 20

(a) Mango (b)

M/P2
M/P2
 O M/P’1 M/P1 O Banana M/P1 M/P’1 21

The above diagrams show the changes in the set of available bundles of goods resulting from changes in
the price of bananas. An increase in the price of bananas makes the budget line steeper as in diagram (a)
and a decrease in the price of bananas makes the budget line flatter as in diagram (b).

Explain the optimal choice of consumer with the help of diagram.

It is a situation in which consumer derives maximum satisfaction with no intension to
change it and subject to given prices and her given income. It is also called as consumer equilibrium.
Under ordinal utility analysis / indifference curve analysis the consumer will be equilibrium when these
conditional are fulfilled they are:

• Consumer chooses her consumption bundle on the basis of her taste and preference.

• Consumer is a rational individual she always chooses the bundle the one which gives
maximum satisfaction among all available bundles.

• The budget line or price line should tangent to the higher indifference curve.

• The marginal rate of substitution between 2 commodities at that particular point equal.

In order to achieve consumer equilibrium that maximizes utility. We have to combine the
indifference curves with budget line to determine the combination of goods that can be purchased within a
certain amount of budget. The point that which the budget line tangent to one of the indifference curves
would be the optimal choice of consumer.

Y
P
(x1 ,x2 )
Mango

IC3
IC2
IC1
O Banana Q X

In the above Diagram PQ is budget line 1C, 1C2, 1C3are difference curves showing different
levels of satisfaction. Banana is measures on OX axis and mango is measured on OY axis. The above
diagrams illustrate the consumers optimal choices also know as consumer’s equilibrium. At (X1, X2)
the budget line PQ is tangent to the indifference curve 1C2. The indifference curve just touching the
budget line is the highest possible indifference curve given the consumers budget set 1C3are not
affordable and 1C1 are certainly inferior

(X1, X2) is the consumer optimum bundle.

 1. Demonstrate the derivation of demand curve from Indifference curve and budget 22
constraints.
Ans: The consumer is indifferent on the different bundles because each point of the bundles
gives the consumer equal utility. Such a curve joining all points representing bundles among which the
consumer is indifferent is called an indifference curve. An indifference curve joins all points
representing bundles which are considered indifferent by the consumer.
The graphical representation of the demand function is called the demand curve. The relation
between the consumer’s demand for a good and the price of the good is likely to be negative in general.
Therefore the demand curve slopes downwards from left to right. The derivation of demand curve from
Indifference curve and budget constraints can be explained with the help of following diagrams.
Let us consider an individual consuming bananas (X 1 ) and mangoes (X 2 ), whose income is
M and market prices of X1 and X2 are P'1 and P '2 respectively. The diagram(a) depicts her consumption
 23

equilibrium at point C, where she buys X '1 and X '2 quantities of bananas and mangoes respectively. In
diagram (b), we plot P '1 against X '1 which is the first point on the demand curve for X 1 .

Y Y
(a) (b)
A Mango
P1
Mango
X2 C D E P2

P3
Demand
O x1 x2 B1 x3 B2 B3 X x1 x2 x3 banana X
Banana

Suppose the price of X 1 (Banana) falls from P1 to P2 , keeping price of X2 (Mango) and income of
consumer constant, the budget set in diagram (a) expands and new consumption equilibrium is on higher
indifference curve at point D where she buys more of bananas. Thus, demand for bananas increases as
its price decreases. We can plot P2 against X 2 in diagram (b) to get the second point on the demand
curve for X 2 . Similarly, the price of bananas may fall further to P 3 , resulting in further increase in
consumption of bananas to X 3 and the consumer moves from point D to E on an higher indifference
curve in diagram (a). So, P3 is plotted against X 3 which gives us third point on the demand curve.
Therefore, we observe that a decrease in price of bananas results in an increase in quantity of
bananas purchased by a consumer who maximizes his utility. Thus, the demand curve is negatively
sloped.

2. Explain the movement along the demand curve and shift in demand curve with the help of
two diagrams.
It is important to note that the amount of a good that the consumer chooses depends on the price of the
good, the prices of other goods, income of the consumer and her tastes and preferences. The demand
function is a relation between the amount of the good and its price when other things remain constant.
Movements along the Demand Curve: The demand curve is a graphical representation of the demand
function. At higher prices, the demand is less and at lower prices, the demand is more. Thus, any change
in the price leads to movements along the demand curve. This can be shown in diagram as follows:
 24

On the other hand, changes in any of the other things like, income of consumer, price of
related goods (substitutes and complementary goods) and tastes and preferences, lead to a shift in
the demand curve. It happens when there is change in income, price of other goods and the
preferences of consumer change.
• Given the price of other goods and preferences of consumer, if income increases, there will be
shift in demand curve.
• For normal goods- shifts right and for inferior goods shift leftwards.
• Given the consumer’s income and his preferences, if the price of a related goods changes,
there will be shift in demand curve.
• If there is increase in price of a substitute good, the demand curve shift to the right.
• If there is increase in price of complementary good, the demand curve shifts leftward

The following diagram depicts the shift in the demand curve towards right
 25

In the above diagram DD is the original Demand Curve and D1 D 1 is the new Demand
curve. If the income of consumer increases the demand for normal goods increases and the demand
curve shifts towards right. Similarly, a rise in the price of a product, the demand for its substitute
increases. This leads to shift in demand curve towards right., .
3. Present the market demand with the help of diagrams.
Ans: The market demand for a good at a particular price is the total demand for all consumers taken
together. The market demand for a good can be derived from the individual demand curves. Suppose
there are two consumers in the market. The market demand curve can be explained in with the help of
following diagrams:
 26

In the above diagrams, D 1 is demand curve of consumer 1 and D 2 is the demand curve of
Consumer 2. Suppose at price P the demand of consumer 1 is ‘q1 ’ and that of consumer 2 is ‘q2 ’ then
the market demand of the good at P is q1 +q2 .
Suppose at price P1 , the demand of consumer is 1 is q1 ’ and that of consumer 2 is q2 ’. Then the
market demand at P1 will be q1’+q2’.So the market demand curve can be derived as a horizontal
summation of the individual demand curves.
Thus, the market demand for the good at each price can be derived by adding up the demands of the
two consumers at that price. If there are more than two consumers in the market for a good, the market
demand can be derived similarly.

4. Analyse the points of elasticity along the linear demand curve.

Ans: Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes
in its price. Price elasticity of demand for a good is defined as the percentage change in demand for the
good divided by the percentage change in its price. Price elasticity of demand for a good is measured with
the help of following formula
PED = Percentage change in quantity demanded = ∆Q/Q x 100
Percentage change in price ∆P/P x 100

PED = ∆Q x P
∆P Q
Here, ∆Q stands for change in quantity, ∆P is change in price, ‘p’ is initial price and ‘Q’ is initial quantity.

Elasticity along a Linear Demand curve:

The linear demand curve is q = a - bp. Note that at any point on the demand curve, the change in
demand per unit change in the price ∆q = -b
∆P
Substituting the value of ∆q/∆p we obtain, ED = – bp/q putting the value of q, ED = – bp/ a – bp. So, it
is clear that the elasticity of demand is different at different points on a linear demand.
The price elasticity of demand is different at different points on the linear demand curve which is
shown in the following diagram:
Y
a/b |eD|=∞

Price |eD|>1

|eD|=1
a/2b
|eD|<1

|eD|=0
O a/2a quantity X
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At p = 0, the elasticity is 0, at q = 0, elasticity is ∞. At p = a/2 b , the elasticity is 1, at

any price greater than 0 and less than a/2b , elasticity is less than 1, and at any price greater than a/2b ,
elasticity is greater than 1.
In the above diagram, |eD|=∞ depicts price elasticity is perfectly elastic, |eD| < 1
depicts the demand is less responsive to a price change; |e D|=1 depicts that the change in demand is
equal to a change in price, |eD|>1 shows that the demand is more responsive to a price change and |eD|=0
depicts that there is no change in quantity demanded due to a change in price. So, price elasticity of
demand is different at different points on the linear demand curve.
V Assignment and project oriented question
1. A consumer wants to consume two goods the price of X 1 is Rs10 and the price of X 2 is Rs.20. the
consumer’s income is Rs.100. Answer the following:
a) How many X1 goods a consumer can consume if the entire income is spent on that good?
b) How many X2 goods a consumer can consume if the entire income is spent on that good?
c) Is the slope of budget line down ward or upward?
d) Are the bundles on the budget line equal to the consumer income or not?
e) If the consumer wants to have more of X 1, good X 2 good has to be given up. Is it
true? Ans: (a) 10 units of X 1 good (100/10)

(b) 5 units of X 2 good (100/20)

(c) Slope of budget line is downward.

(d) Yes, the bundles on the budget line are equal to the consumer’s income.

(e) True. If the consumer wants to have more of X 1 he has to give up X2 .

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