The Individual Demand

Price Consumption Curve (PPC): traces the utility-maximizing

combinations of two goods, say clothing and food associated with
every possible price of the two goods (Fig.4.1a)
As price of food falls, the consumption of clothing may increase
or decrease
The consumption of both food and clothing can increase because
the decrease in the price of food has increased the consumers
ability to purchase both goods (Fig. 4.1)

An Individual Demand Curve relates to a quantity of

a good that a single consumer will buy to the price of
that good. In Fig. 4.1(b), the IDC relates the quantity of
food that the consumer will buy to the price of food.
This Curve has two important opportunities:
the level of utility that can be attained changes as we
move along the curve
at every point on the demand curve, the consumer is
maximizing utility by satisfying the condition that the
MRS of food for clothing equals the ratio of prices of
food and clothing
Income Consumption Curve traces out the utilitymaximizing combinations of food and clothing
associated with every income level. The curve slopes
upwards because the consumption of both food and
clothing increases as income increases (Fig. 4.2 a)

 Normal

goods are those goods in which the

demand for them increases as income increases
(income elasticity of demand is positive)

Inferior

goods are those goods in which the

demand for them is less as income increases
(income elasticity of demand is negative)

Engel Curves
Engel Curves relate the quantity of a good
consumed to income. In Fig. 4.4 (a), food is a
normal good and the Engel Curve is upward
sloping. In (b), hamburger is a normal good for
income less than Rs.2000 per month and an
inferior good for income greater than Rs.2000 per
month
Giffen Good
The decline in the price of food frees enough
income so that the consumer desires to buy more
clothing and fewer units of food(Fig. 4.7)

Income and Substitution Effects

Income effect: If one of the goods becomes cheaper,
consumers enjoy an increase in real purchasing
power. They are better off because they can buy the
same amount of the good for less money, and thus
have money left over for additional purchase. The
change in demand resulting from this change in real
purchasing power is called the income effect
Substitution effect: consumers will tend to buy more
of the good that has become cheaper and less of
those goods that are now relatively more expensive.
This response to a change in the relative prices of
goods is called the substitution effect
Total Effect (F1 F2) = Substitution Effect (F1E) +
Income Effect (EF2), Fig. 4.6

Market Demand Schedule/Curve: sum of all

individual demand curves of all consumers in a
particular market.
Two points on a demand curve:
the market demand curve will shift to the right as
more consumers enter the market
factors that influence the demands of many
consumers will also affect market demand
Relevance of individual and market demand
curves

Price Elasticity: Proportionate change in QD due to

a proportionate change in price
o Income Elasticity: Proportionate change in QD due
to proportionate change in income
o Cross Elasticity: Proportionate change in QD for X
due to proportionate change in price of Y
Degrees of Elasticity
Perfectly elastic
Perfectly inelastic
Relatively elastic
Relatively inelastic
Unitary elastic

 Consumer

Surplus: Surplus of 120 + 100 + 80+

60 + 40 + 20 = Rs. 420.

Bandwagon
Snop

Effect: go with the crowd

Effect: Go alone

 Short

Run verses Long Run Elasticity

For many goods, demand is much more price
elastic in the long run than in the short run
For some goods, (durable) demand is more
elastic in the short run than in the long run
The industries producing durable goods are
vulnerable to changing conditions and in
particular to the business cycle. These industries are often called as cyclical industries