consumer behavior

1. CONSUMER BEHAVIOR-2
PRESENTED BY :- 1)YUNUS SHAIKH – 79 2)SABA SHAIKH – 55 3)HUMERA PATEL – 83
4)ASHWAQ MULTANI – 88 5)SHAHENA SHAIKH - 58

2. CONCEPT OF ELASTICITY OF DEMAND :
• The term elasticity indicates responsiveness of one variable to a change in the other
variable
• Elasticity of demand refers to the degree of responsiveness of quantity demanded to a
change in its price or any other factor

3. TYPES OF ELASTICITY OF DEMAND :
1. Income Elasticity
2. Cross Elasticity
3. Promotional Elasticity
4. Price Elasticity

4. 1. INCOME ELASTICITY OF DEMAND :
• It refers to the degree of responsiveness of change in quantity demanded to a change in
the income only , other factors including price remain unchanged
• Income Elasticity of demand =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
𝑒𝑌 =
∆𝑄𝐷
∆𝑌
×
𝑌
𝑄𝐷
𝒆𝒀= 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑
Y = Original Income
QD = Original Demand
△ 𝑸𝑫 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
△ 𝒀 = Change in Income

5. • For Example : If consumer’s income rises from Rs. 100 to Rs.102, the quantity demanded
increases from 25 units to 30 units
• 𝑒𝑌 =
∆𝑄𝐷
∆𝑌
×
𝑌
𝑄𝐷
𝑒𝑌 =
5
2
×
100
25
= 10
• If 𝑒𝑌 is positive then it is normal good
• If 𝑒𝑌 is negative then it is inferior good

6. 2. CROSS ELASTICITY OF DEMAND :
• It refers to a change in quantity demanded of one commodity (X) due to change in the
price of other commodity (Y)
• Cross Elasticity of demand =
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒐𝒇 𝒈𝒐𝒐𝒅𝟏 𝑸𝑿
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒈𝒐𝒐𝒅 𝟐 𝑷𝒀
𝒆𝒙𝒚 =
∆𝑸𝒙
∆𝑷𝒚
×
𝑷𝒚
𝑸𝒙
𝒆𝒙𝒚= 𝐶𝑟𝑜𝑠𝑠 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑
𝑷𝒚 = Original Price of Commodity “Y”
𝑸𝒙 = Original Demand of Commodity “X”
∆𝑸𝒙 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 "𝑋"
∆𝑷𝒚 = Change in Price of Commodity "Y"

7. • For Example : If price of X rises from Rs.750 to Rs.800 as a result demand for Y increases from
60 units to 70 units then cross elasticity of demand is :
• 𝒆𝒙𝒚 =
∆𝑸𝒙
∆𝑷𝒚
×
𝑷𝒚
𝑸𝒙
• 𝒆𝒙𝒚 =
10
50
×
750
60
=
5
2
= 2.5
• 𝐶𝑟𝑜𝑠𝑠 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 is positive when goods are substitute (tea, coffee)
• 𝐶𝑟𝑜𝑠𝑠 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 is negative in case of complementary goods (tea and sugar)
• 𝐶𝑟𝑜𝑠𝑠 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 is zero when goods are Non-related (tea, book)

8. 3. PROMOTIONAL ELASTICITY OF DEMAND :
• It measures the percentage rate of change in quantity demanded due to percentage rate of
change in advertisement expenditure of a firm
• 𝑒𝑝𝑟 =
% ∆ 𝑖𝑛 𝑞𝑢𝑛𝑎𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑜𝑛 𝑎𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑒𝑚𝑒𝑛𝑡
𝑒𝑝𝑟 =
∆𝑄𝐷
∆𝐴
×
𝐴
𝑄𝐷
𝒆𝒑𝒓 = Promotional 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑
𝑨 = Advertisement expenditure of a firm
𝑸𝑫 = Original Demand
∆𝑸𝑫 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
∆𝑨 = Change in spending on advertisement

9. 4. PRICE ELASTICITY OF DEMAND :
• Degree of responsiveness of change in demand due to change in price is called price
elasticity of demand
• 𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑒𝑝 =
𝑃
𝑄𝐷
×
∆𝑄𝐷
∆𝑃
𝒆𝒑 = Pr𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑
𝑷 = Original Price
𝑸𝑫 = Original Demand
∆𝑸𝑫 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
∆𝑷 = Change in price

10. TYPES OF PRICE ELASTICITY OF DEMAND :
1) Perfectly Elastic Demand
2) Relatively Elastic Demand
3) Unitary Elastic Demand
4) Relatively Inelastic Demand
5) Perfectly Inelastic Demand

11. 1) PERFECTLY ELASTIC DEMAND ( EP = ∞) :
• When small change in price brings about infinite change in QD, for a commodity it is
called perfectly elastic demand
• For example, 10% fall in price may lead to an infinite rise in demand
• 𝐸𝑝 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
=
10
0
= ∞

12. 2) PERFECTLY INELASTIC DEMAND ( EP = 0) :
• When change in price does not bring about any change in QD, for a commodity it is called
perfectly inelastic demand
• For example, 20% fall in price will have no effect on quantity demanded
• 𝐸𝑝 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
=
0
20
= 0

13. 3) UNITARY ELASTIC DEMAND ( EP = 1) :
• When a percentage change in price brings about equal proportionate change in demand, it
is called unitary elastic demand
• For example, 50% fall in price of a commodity leads to 50% rise in quantity demanded
• 𝐸𝑝 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
=
50
50
= 1

14. 4) RELATIVELY ELASTIC DEMAND ( EP > 1) :
• When a percentage change in a price leads to more than proportionate change in quantity
demanded, the demand is said to be relatively elastic
• For example, 50% fall in price leads to 100% rise in quantity demanded
• 𝐸𝑝 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
=
100
50
= 2
Ep >
1

15. 5) RELATIVELY INELASTIC DEMAND ( EP < 1) :
• When a percentage change in a price leads to less than proportionate change in quantity
demanded, the demand is said to be relatively inelastic
• For example, 50% fall in price leads to 25% rise in quantity demanded
• 𝐸𝑝 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
=
25
50
= 0.5

16. METHODS FOR MEASURING PRICE ELASTICITY OF
DEMAND :
1) Point elasticity method :
 Prof. Marshall has developed method to measure elasticity of demand, which is known as
point method or geometric method
 At any point on the demand curve, elasticity of demand is measured using the following
formula :
𝐸𝑙𝑎𝑠𝑖𝑐𝑖𝑡𝑦 𝑎𝑡 𝑝𝑜𝑖𝑛𝑡 ∶
𝑷
𝑸𝑫
×
∆𝑸𝑫
∆𝑷

17. • Lets understand with the help of example ,
• Now lets plot the graph of above example, by taking price on Y- axis and quantity
demanded on X- axis
Price Quantity Demanded
1 500
2 400
3 300
4 200
5 100

18. Y – axis
X – axis
Price
Quantity Demanded
5
4
3
2
1
0
100 200 300 400 500
B
C
F
G
H
Ep = ∞
Ep = 1
Ep = 0
.
.
Perfectly elastic
demand
Ep > 1
Ep < 1

19. • Let us now calculate the value,
• Price elasticity at point 𝑩 is :
𝐸𝑝 =
∆𝑄𝐷
∆𝑃
×
𝑃
𝑄𝐷
= −
100
1
×
5
100
= −5
• This means that 1% increase in price brings about 5% decrease in demand for a commodity
• At point C ,
𝐸𝑝 =
∆𝑄𝐷
∆𝑃
×
𝑃
𝑄𝐷
= −
100
1
×
4
200
= −2
• At point F ( midpoint) ,
𝐸𝑝 =
∆𝑄𝐷
∆𝑃
×
𝑃
𝑄𝐷
= −
100
1
×
3
300
= −1
• At point G,
𝐸𝑝 =
∆𝑄𝐷
∆𝑃
×
𝑃
𝑄𝐷
= −
100
1
×
2
400
= −
1
2

20. • At point H ,
𝐸𝑝 =
∆𝑄𝐷
∆𝑃
×
𝑃
𝑄𝐷
= −
100
1
×
1
500
= −
1
5
Hence the price elasticity is different at different points on the demand curve
So price elasticity of demand is greater than one above the midpoint of the demand curve and less than
one below the midpoint of the demand curve

21. 2) ARC ELASTICITYAND MIDPOINT METHOD :
• Arc elasticity measures elasticity at the midpoint between two selected points on the demand
curve by using a midpoint between the two points
• Let us understand it with the help of following example,
• Consider point A on the demand curve, At 𝑃𝑜𝑖𝑛𝑡 𝐴: − 𝑃𝑟𝑖𝑐𝑒 = 𝑅𝑠. 4 𝑎𝑛𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 120
• Consider point B, At 𝑃𝑜𝑖𝑛𝑡 𝐵: − 𝑃𝑟𝑖𝑐𝑒 = 𝑅𝑠. 6 𝑎𝑛𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 80
• Elasticity at point A =
𝑃
𝑄𝐷
×
∆𝑄𝐷
∆𝑃
=
4
120
×
120−80
6−4
=
4
120
×
40
2
= 0.66

22. • Elasticity at point B =
𝑃
𝑄𝐷
×
∆𝑄𝐷
∆𝑃
=
6
80
×
120−80
6−4
=
6
80
×
40
2
= 1.5
• Going from point A to B, price elasticity of demand is 0.66. By contrast, going from point B to A, the price
elasticity of demand is 1.5
• Thus price elasticity from point A to B is different from point B to A, it should be same but it is different
• In order to overcome this problem midpoint method is used
Y -axis
X - axis
20 40 60 80 100 120 140
6
5
4
3
2
1
0
B
A
Quantity demanded
Price

23. • Lets consider, the midpoint price of Rs.4 and Rs.6 is Rs.5, and the midpoint quantity demanded of 120 and 80 is 100 units ,
hence assuming , A(4,120) = (P1, Q1) and B(6,80) = (P2, Q2) , Midpoint P = Rs. 5 , Midpoint Qd = 100 units
• Formula :
𝑷𝟐 −𝑷𝟏
𝑴𝒊𝒅𝒑𝒐𝒊𝒏𝒕 𝑷
× 100 ,
𝑸𝟐 −𝑸𝟏
𝑴𝒊𝒅𝒑𝒐𝒊𝒏𝒕 𝑸
× 100
• Therefore, according to midpoint method, a change in price Rs.4 to Rs.6 is 40% rise :
6−4
5
× 100 = 40%
• Similarly, a change from Rs.6 to Rs.4 is also 40% fall :
4−6
5
× 100 = −40 %
Y -axis
X - axis
20 40 60 80 100 120 140
6
5
4
3
2
1
0
B
A

24. • Now lets consider quantity demanded from A to B, change from 120 to 80 is 40 units and the midpoint of
120 and 80 is 100 units :
120−80
100
× 100 = 40 , Similarly from B to A :
80−120
100
× 100 = 40
• Because the midpoint method gives the same answer regardless of the direction of change, it is often used
when calculating the price elasticity of demand between two points
• According to midpoint method, when going from A to B, price rises by 40% and quantity demanded
decreases by 40%. Similarly going from B to A, price decreases by 40% and quantity demanded increases
by 40%, In both directions the price elasticity of demand is equal to 1
• Formula for midpoint method for the price elasticity of demand between two points 𝑄1,𝑃1 𝑎𝑛𝑑 𝑄2, 𝑃2 :
𝑷𝒓𝒊𝒄𝒆 𝒆𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 =
∆𝑸
∆𝑷
×
𝑷𝟏 + 𝑷𝟐
𝑸𝟏 + 𝑸𝟐

25. 3) TOTAL EXPENDITURE, TOTAL REVENUE AND
ELASTICITY OF DEMAND :
• In this method, total amount of expenditure before and after the price change is compared
• Here the total expenditure refers to the product of price and quantity demanded
• Total expenditure = Price × Quantity Demanded
• 𝑇𝑅 = 𝑃 × 𝑄
• If price of a commodity is Rs. 10 and quantity demanded is 100 units,
𝑇𝑅 = 100 × 10 = 𝑅𝑠. 1000

26. • In this connection, Marshall has given the following propositions :
A. Relatively elastic demand (Ed > 1)
B. Unitary elastic demand (Ed = 1)
C. Relatively inelastic demand (Ed < 1)
Price in ₹ (P) Quantity
Demanded in units
(Q)
Total outlay (P×Q) Elasticity of
Demand
A 6
5
10
20
60
100
Ed > 1
B 4
3
30
40
120
120
Ed = 1
C 2
1
50
60
100
60
Ed < 1

27. • If demand for a good is inelastic then increase in price causes increase in total expenditure :

28. • Elastic Demand and Total Expenditure : Increase in price causes decrease in total expenditure :

29. DETERMINANTS OF PRICE ELASTICITY OF DEMAND :
1. Necessities versus luxuries : Necessities tend to have relatively inelastic demands, whereas luxuries
have relatively elastic demands
2. Availability of close substitutes : If a commodity has close substitute then demand for a commodity
will be elastic and if a commodity does not have close substitute then demand will be inelastic
3. Time horizon : How much time one takes to adjust to new price situation
4. Proportion of income spent on the product : If one is spending a very small % of their income on a
commodity then normally demand for commodity is price inelastic and If one is spending a very
large % of their income on a commodity then normally demand for commodity is price elastic