Theory of consumer behaviour

1. TOPIC 1.1 : Theory of consumer Behaviour
Theory of Demand Function (In Brief)

2. Demand and Demand Function
 Demand in Economics refers to the desire of an individual to purchase the
good backed by his feasibility to purchase the good.
 The demand problem arises because the consumers face constrained
optimisation problem.
 According to the law of demand, there is an inverse relationship between
prices of the good and its quantity demanded. This makes the demand curve
downward sloping.
 There are few exceptional cases to the law, where the law of demand gets
violated. These two cases are of Giffen goods and Veblen Goods
 The operation of law of demand is due to the combined working of Income
Effect and Substitution Effect.

3. Income Effect and Substitution Effect
 Income Effect : It is the increase in purchasing power of the consumer due to
reduction in prices, inducing consumer to buy more of that good .
 Substitution Effect : Goods become relatively cheaper to other goods due to
price reduction facilitating its quantity demanded.
 Both the income effect and substitution effect work in a combined manner to
ensure the working of law of demand. The movement of the quantity
demanded with respect to the prices of the good will thus depend on which of
the income and substitution effect is stronger and in which direction.