Economics | Consumer behaviour and demand

👋 Welcome to Consumer Behaviour and Demand!

Hello future economists! This chapter is where we start building the foundation of Microeconomics. We are moving into the "Markets in Action" section, and to understand markets, we first have to understand the people who drive them: Consumers.

We will explore why you buy the things you do, why prices affect your decisions, and how economists model these choices. Don't worry if concepts like "Utility" sound complex—we'll break them down using everyday examples like water and pizza!

Why is this important? Understanding consumer behaviour is key to predicting how markets will react to changes in price, income, or fashion trends. This knowledge helps firms decide what to produce and helps governments decide how to tax or subsidise goods.

Section 1: The Basics of Demand

1.1 Defining Demand (The Effective Kind!)

In everyday life, demand means wanting something. But in Economics, we need a more precise definition.

Key Term: Demand
Demand is the quantity of a good or service that consumers are willing and able to purchase at various prices over a specific period of time.

Think of it like this:

• Willing: You really want a Ferrari.
• Able: You actually have the money to buy a Ferrari.

1.2 The Law of Demand

This is one of the most fundamental laws in Economics. It describes the relationship between the price of a good and the quantity demanded by consumers.

The Law of Demand states:
As the price of a good increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases.

In short: Price and Quantity Demanded have an inverse relationship.

Example: If the price of your favourite chocolate bar doubles, you are likely to buy fewer of them. If the price halves, you will probably stock up!

A crucial concept: Ceteris Paribus
When stating the Law of Demand, we must always assume Ceteris Paribus.

Key Term: Ceteris Paribus
A Latin phrase meaning "all other things being equal" or "all other factors remain unchanged."

We use this to isolate the impact of price alone. If the price of the chocolate bar doubles, but your income also doubles, the relationship might not hold. We must hold income, tastes, and other factors constant to prove the Law of Demand.

1.3 Visualising Demand: The Demand Curve

The demand curve is a graphical representation of the demand schedule (a table showing quantity demanded at different prices).

• Y-axis: Price (P)
• X-axis: Quantity Demanded (\( Q_d \))

Because of the Law of Demand, the demand curve (usually labelled 'D') always slopes downwards from left to right.

(Note: While we can't draw the graph here, imagine a line starting high on the left and ending low on the right. This shows that at a high price, quantity demanded is low, and vice versa.)

Quick Takeaway: Demand is wanting AND affording something. The core rule is: when price goes up, people buy less (Ceteris Paribus).

Section 2: Changes in Demand (Movements vs. Shifts)

This is often the trickiest part for new students, but understanding the difference between a movement and a shift is vital for all market analysis.

2.1 Movement Along the Demand Curve

A movement occurs when the only factor changing is the price of the good itself.

• If Price falls: We move down the curve, leading to an extension of demand (higher quantity demanded).
• If Price rises: We move up the curve, leading to a contraction of demand (lower quantity demanded).

Memory Aid: If you only change the P (Price) on the P-axis, you stay on the same curve. You just Move along it.

2.2 Shifts in the Demand Curve

A shift occurs when a factor *other than* the price of the good causes consumers to change their buying habits. These are the non-price determinants of demand.

• Shift Right (D to \( D_1 \)): An increase in demand. Consumers want to buy more at every single price.
• Shift Left (D to \( D_2 \)): A decrease in demand. Consumers want to buy less at every single price.

2.2.1 The Key Determinants of Demand (Factors that Shift the Curve)

These factors determine where the whole curve sits on the graph. If any of these change, the curve shifts left or right.

Memory Aid (Use BITER or PINTWC): We'll use BITER for a concise list.

1. Buyer Tastes and Preferences (T)
2. Income (I)
3. The Price of Related Goods (P)
4. Expectations (E)
5. Size/Composition of the Population (S) - Often included separately

Let's look at the three most important factors in detail:

1. Income (I):

• Normal Goods: As income rises, demand for these goods rises (e.g., designer clothing, restaurant meals). (Curve shifts right).
• Inferior Goods: As income rises, demand for these goods falls (e.g., cheap instant noodles, budget bus services). People switch to better alternatives (steak, flying). (Curve shifts left).

2. Price of Related Goods (P):

• Substitutes: Goods that can be used in place of one another (e.g., Coke and Pepsi). If the price of Coke rises, the demand for the substitute (Pepsi) rises. (Pepsi curve shifts right).
• Complements: Goods that are consumed together (e.g., cars and petrol, coffee and sugar). If the price of cars rises dramatically, fewer cars are sold, so the demand for the complement (petrol) falls. (Petrol curve shifts left).

3. Tastes and Preferences (T):

Changes in fashion, health warnings, or successful advertising campaigns. If a new study shows coffee is healthy, demand for coffee rises. (Curve shifts right).

Quick Takeaway: Price changes cause movements (along the line). Non-price factors (BITER) cause shifts (new line).

Section 3: Why Does the Demand Curve Slope Downwards? Utility Theory

To truly understand consumer behaviour, we need to look at the satisfaction (or 'utility') consumers get from consuming goods. This is the behavioural reason why the Law of Demand exists.

3.1 Utility: Total and Marginal

Key Term: Utility
The satisfaction, usefulness, or pleasure a consumer gets from consuming a good or service.

Total Utility (TU)

This is the total satisfaction gained from consuming a certain quantity of a product (e.g., eating all five slices of pizza).

Marginal Utility (MU)

This is the extra satisfaction gained from consuming one additional unit of a good or service (e.g., the satisfaction gained specifically from the fifth slice of pizza).

Mathematically: \( MU = \frac{\Delta TU}{\Delta Q} \)

Analogy: Imagine filling up a battery (Total Utility). The charge gained from the last bit of electricity (Marginal Utility) might be very small if the battery is already nearly full.

3.2 The Law of Diminishing Marginal Utility (LDMU)

This is the crucial economic concept that explains behaviour.

LDMU states:
As a consumer increases the consumption of a good, after a certain point, the Marginal Utility (the extra satisfaction) gained from each additional unit consumed will eventually start to decrease.

Example: You are very thirsty in the desert.

1. The first glass of water gives you massive satisfaction (High MU).
2. The second glass is also good, but slightly less satisfying than the first.
3. By the sixth glass, you are full. The MU of the sixth glass is almost zero, or possibly negative (if you feel sick).

Did you know? This law applies to almost everything, from listening to a favourite song repeatedly to collecting baseball cards. The joy of the first unit is often unmatched.

3.3 Linking LDMU to the Downward Sloping Demand Curve

The LDMU provides the psychological explanation for the Law of Demand.

Step-by-Step Logic:

1. You buy the first unit of a good because the satisfaction (MU) you receive is greater than the price you pay.
2. According to LDMU, the satisfaction (MU) you get from the second unit is lower than the first.
3. A rational consumer will only be willing to buy a unit that provides less satisfaction if the price also drops.
4. Since each subsequent unit provides less MU, the consumer is only willing to pay less for each subsequent unit.

Therefore, for firms to sell more goods (i.e., for the quantity demanded to increase), they must lower the price—resulting in the downward-sloping demand curve.

We have now moved from simple observation (Law of Demand) to deep understanding (Utility Theory). Great job tackling these core microeconomic principles!