# NCERT Notes for Class 11 Micro Economics Chapter 2 THEORY OF CONSUMER BEHAVIOR

## Class 11 Micro Economics Chapter 2 THEORY OF CONSUMER BEHAVIOR

NCERT Notes for Class 11 Micro economics Chapter 2 THEORY OF CONSUMER BEHAVIOR , (Economics) exam are Students are taught thru NCERT books in some of state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students prepare for evaluation. Students need to clear up those exercises very well because the questions with inside the very last asked from those.

Sometimes, students get stuck with inside the exercises and are not able to clear up all of the questions.  To assist students, solve all of the questions and maintain their studies without a doubt, we have provided step by step NCERT Notes for the students for all classes. These answers will similarly help students in scoring better marks with the assist of properly illustrated Notes as a way to similarly assist the students and answering the questions right.

## Class 11 Micro Economics Chapter 2 THEORY OF CONSUMER BEHAVIOR

BUDGET SET: The set of two goods available to buy a consumer with his income is called budget set:

• The equation of the budget set is 𝑃1𝑋1 + 𝑃2X2 ≤ M.
• Here P1Price of first good. X1 is the amount of good 1.
• P2 is the price of second good and X2 is the amount of second good.
• There is an inequality in the budget set equation is called budget constraint.
• P1,P2 and M are the budget constraints.

BUDGET LINE : The line which shows the locus of points of budget sets which costs exactly equal to income.

• The equation of the budget line is 𝑃1𝑋1 + 𝑃2𝑋2 = 𝑀.
• 𝐻𝑒𝑟𝑒 Is the price of first good, P2 is the price of second good, X1 amount of first good, X2 amount of second good and M is consumer’s income.
• The following is a budget line.

Points on the budget line shows preferred bundle, points above the budget line shows superior bundle, and point below the budget line shows inferior bundles. This shown by the following diagram.

PRICE RATIO OR SLOPE OF THE BUDGET LINE: The amount of Good2 sacrificed to buy one extra unit of Good1 is called price ratio or slope of the budget line. ∆𝑋2/∆𝑋1 = − 𝑃1/𝑃2

CHANGES IN BUDGET SET : Changes in the budget line occur due to the changes in price of the commodity or changes in income of the consumer.

CHANGES IN THE INCOME OF THE CONSUMER: There are two types of changes in the income of the consumer. They are

1- Increase income of the consumer:

• When income of the consumer increases, the consumer can buy more of two goods.
• Then the budget line shifts towards right.
• This is shown by the following diagram.

2- Decrease in income of the consumer:

• When income of the consumer decreases, the consumer can buy less of two goods.
• Then the budget line shifts towards left.
• This is shown by the following diagram.

Good 2

CHANGES IN THE PRICE OF FIRST GOOD: There are two types of changes occur in the price of the first good. They are the following.

. X

Good 1

O.

Y

𝑀

𝑃2

𝑀′

𝑃2

• Increase in price of first good: When the price of first good increases from P1 to P’1,the budget line shift towards left only in X axis. This is shown by the following diagram.

Good 2

• DECREASE IN PRICE OF FIRST GOOD: When the price of first good decrease from P1 to P’1,the budget line shift towards right only in X axis. This is shown by the following diagram

𝑀

𝑃2

Good 2

O Good 1

CHANGES IN THE PRICE OF SECOND GOOD: There are two types of changes occur in the price of the second good. They are the following.

• INCREASE IN PRICE OF SECOND GOOD: When the price of Second good increases from P2 to P’2,the budget line shift towards left only in Y axis. This is shown by the following diagram.

Good 2

𝑀

𝑃1

𝑀

𝑃′2

O Good 1 𝑀

𝑃1

• DECREASE IN PRICE OF SECOND GOOD: When the price of Second good decrease from P2 to P’2,the budget line shift towards left only in Y axis. This is

shown by the following diagram. Y

𝑀′

𝑃2

Good 2

𝑀

𝑃2

O Good 1 𝑀 𝑋

𝑃1

Monotonic preference : Between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other goods as compared to other bundles. Such preferences of the consumer is called monotonic preferences.

INDIFFERENCE CURVE: It is the combination of two goods, which give the same level of satisfaction to the consumer. The slope of Indifference curves is equal to the rate of substitution or Marginal rate of substitution. The following is a indifference curve.

Slope of IC =

• A

•C

Y

Here, Point A C shows indifferent bundles or preferred bundles.

Point B shows inferior bundle.

∆𝑿𝟐

∆𝑿𝟏

Good 2. •B

IC

O.

Good 1. X

Properties of Indifference curve:

1. IC are convex to the origin because Diminishing Marginal Rate of substitution.(DMRS)
2. IC Slope downward from left to right.
3. Towards right, they show higher level of satisfaction.
4. Indifference curves do not intersect each other.
5. A group of Indifference curves is called Indifference Map.

UTILITY: Want satisfying capacity of a commodity is called utility. The total satisfaction get from consuming all bundles of commodities is called Total Utility. Additional utility get from

the consumption of an additional unit of commodity is called Marginal utility. Utility can be measures with the unit UTILE.

CONSUMERS EQUILIBRIUM OR CONSYNERS OPTIMUM: It is a point where a

consumer can enjoy maximum satisfaction with his income. In other words it is a point where budget line is tangent to the budget line. At this point MRS= Slope of the budget line.

Mathematically it can be expressed as ∆𝑋2 = − 𝑃1.It can be shown as follows.

∆𝑋1 𝑃2

In the above diagram ‘BL’ represents budget line. IC1,IC2,IC3 are the Indifference curves. Point ‘ E’ represents the consumers equilibrium. At the point E the budget line is tangent to indifference curve. Here the slope of Indifference curve is equal to Marginal Rate of substitution.

DEMAND: Demand is a desire backed by ability and willingness to pay for a commodity. The functional relationship between demand and demand determining factors is called demand function. Algebraically q= f(P,Pr,M,T).

LAW OF DEMAND : If other things remaining the same, price of a commodity increases its quantity demanded will be Decreases and vice versa .This inverse relationship between price and quantity is called Las of Demand. The other things mean Income of the consumer, price of related goods, Taste and preferences of the consumer, Climate, Fashion etc.These factors are called demand determining factors.

DEMAND CURVE: The graph, which shows the inverse relationship between price and quantity demanded is called Demand Curve.The Demand Curve is a downward sloping curve because of the following reasons

1. Price effect: Change in demand due to the change in price is called price effect.
2. Substitution effect: It is the effect between two commodities. If the price of one commodity increases, the quantity demanded of the other commodity increases.
3. Income effect: Change in the quantity demanded of a commodity due to the change in the real income of the consumer. It is called substitution effect.

The following is a demand curve.

PRIC

Y

D

E

D

O. QUANTITY X

CHANGES IN DEMAND: There are two types of changes occur in demand. They are the following.

1. MOVEMENT ALONG A CURVE: Changed in demand due to the change in price of the commodity is called movement along a curve. When price of a commodity Decreases, it’s quantity demanded increases,then the demand curve move right wards. It is called expansion of Demand. In the similar way price of a commodity increases, the demand curve move leftward. It is called

2)Contraction of Demand.This shown by the following diagram.

Y

D.

PRICE

D. O. Quantity.

O. Quantity X.

{EXPANSION OF DEMAND } { CONTRACTION OF DEMAND}

1. SHIFT IN DEMAND: The change in demand due to factors other than price is called shift in demand. Shift of Demand Curve to the right wards due to changes in non price factors is called Increase in demand. The leftward shift of Demand Curve due to changes in non price factors is called Decrease in demand. This is shown by the following diagram.

Y

D.

P

D.

D1.

D

D1

P

D1

D

Y

Price. Price

O Quantity X O. Quantity. X

{INCREASE IN DEMAND}. { DECREASE IN DEMAND}

MARKET DEMAND: The total Demand in the market at a particular price is called market demand. In other words it is the horizontal summation of individual Demand. The following table and diagram show Market Demand. Y

 Price Demand (1) QD=10-P Demand (2) QD= 20-2P Market demand MD= 30-3P 1 9 18 27 2 8 16 24 3 7 14 21 4 6 12 18

Price

O Quantity.

ELASTICITY OF DEMAND:The degree of responsiveness of quantity demanded according to the change in price is called elasticity of demand. According to the responsiveness price elasticity of demand is classified into five.They are the following.

PERFECTLY ELASTIC DEMAND: A small change in price causes an in

finite change in price is called perfectly elastic Demand. Perfectly elastic Demand Curve is a horizontal straight line.

Y

Price ED=∞

PERFECTLY INELASTIC DEMAND:Any change in price don’t cause any change in quantity demand is called perfectly inelastic demand.It is a vertical straight line parallel to OY axis. This is shown by the following diagram.

Y.

P

Price. ED = 0

P1

O. Quantity. X

1. UNITARY ELASTIC DEMAND: A change in price is caused proportionate change in quantity is called unitary elastic Demand. It is a rectangular hyperbola.

Y

P

ED= 1

D

Price

O Quantity. X

1. RELATIVELY ELASTIC OR MORE ELASTIC OR ELASTIC DEMAND:

A change in price causes more than proportionate change in quantity demanded is called more elastic Demand. More elastic Demand Curve is shown by the following diagram. (Refer page 9)

1. RELATIVELY IN ELASTIC OR LESS ELASTIC OR INELASTIC DEMAND:

A change in price causes less than proportionate change in quantity demanded is called less elastic Demand.It’s demand curve is shown as follows.(Refer page 9)

METHODS FOR MEASURING PRICE ELASTICITY OF DEMAND: Price elasticity of

Demand can be measured in three different ways.

1. Percentage method: under this method elasticity measured by dividing the percentage change in quantity demand by percentage change in price.The following formula is used to find price elasticity of demand.

ED = Percentage change in quantity demanded OR 𝐸𝐷 = ∆𝑄 × 𝑃

Percentage change in price

∆𝑃 𝑄

1. Geometric method: Under this method we use the following formula is used to find price elasticity of demand.

ED = lower segment Upper segment

The following diagram shows different elasticities at different parts of a Demand Curve.

Y

• E (ED=0)

O.

• D (ED<1)
• C (ED=1)
• B (ED>1)

𝑞

𝐸𝐷 = − 𝑏𝑝

• A (ED= ).

Price

Quantity. X

1. EXPENDITURE METHOD : Under this method price elasticity is measures in terms of total expenditure. Using this method we can calculate three types of elasticity.
1. When price and total expenditure moves opposite direction, there will be more elastic.
2. When price and total expenditure moves same direction,there will be less elastic
3. Any changes in price doesn’t affect total expenditure,there will be unitary elastic

More elastic and less elastic Demand Curves

More elastic.

D

D

Less elastic.

SUBSTITUTE GOODS OR SUPPLEMENTARY GOODS:The goods which used as substitute to satisfy a need are called substitute goods.eg coffee and tea, bus and train.

PRICE

COMPLEMENTARY GOODS : The goods which used together are called complementary goods. Eg bread and jam, pen and ink.

NORMAL GOODS: when Income of the consumer increases,quantity Demand of certain commodities also increases. Such goods are called normal goods.

Eg. Television, computer.

INFERIOR GOODS: When consumers Income increase Demand of certain commodities Decreases. Such commodities are called inferior goods. Eg.beedi,tapioca FACTORS DETERMINING PRICE ELASTICITY OF DEMAND: The following

are factors affecting price elasticity of demand.

1. Nature of the product: The price elasticity of laxuary goods are high elastic and elasticity of necessary goods are low elastic.
2. Availability of close substitutes : Substitute goods have high elastic Demand and non Substitute goods have inelastic Demand
3. Proportion of Income spent on goods: Consumers usually spend only a small portion of income on goods like salt,match boxes etc.Elasticity of such goods have low elasticity.
4. Income of the Consumer
5. Price of the goods
6. Time period.