Chap-2 - U N I T- I I CONSUMER BEHAVIOUR DEMAND AND 16...

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C ONSUMER B EHAVIOUR AND D EMAND UNIT-II
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In Chapter 1 it was stated that, in a market- oriented economy, the central problems of “what”, “how” and “for whom” are solved through forces of demand and supply for various goods and services. Who demands a particular good and who supplies it? This depends on the type of good or service in question. Consider a final product such as alu bhujia . 1 As consumers, households are the demanders of alu bhujia and companies like Bikanerwala and Leher are the suppliers. Another example is the service of a computer programmer. This service is demanded by companies or firms. Who are the suppliers of this service? The households, because some members of some households work as computer programmers. In summary, in case of final goods and services, households demand them and firms supply them. In case of services that are required for production, households are the 1 Final goods and services include things that are consumed by households, e.g. a piece of bread, a haircut, a bicycle repair job etc. As opposed to final goods and services, there are “intermediate” goods (or raw materials) that are “consumed” (i.e. used up) by businesses. The examples are steel in a bicycle factory, wheat in a flour mill, and various automobile components in a Maruti car workshop. C ONSUMER C HOICE AND THE D EMAND C URVE C HAPTER 2 2.1 Consumer's Equilibrium 2.2 Meaning and 2.4 Price Elasticity of
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C ONSUMER C HOICE AND THE D EMAND C URVE 17 suppliers and the firms are the demanders. This chapter deals with households as consumers and their demand for final goods and services. How should a consumer decide how much of a product to buy? What factors do affect this decision and how? 2.1 CONSUMER’S EQUILIBRIUM: THE BASIS OF THE LAW OF DEMAND Let us ignore for the moment the word “equilibrium” or the phrase “Law of Demand”, and focus on the question of how much of any particular good a consumer should demand (or buy) at a given point of time. In order to understand this, we first have to learn a few concepts. 2.1.1 Utility Concepts We begin with the notion that a consumer derives some satisfaction from consuming a product; otherwise, she would not demand it at all. This is captured by a term called total utility , defined as the total psychological satisfaction a consumer obtains from consuming a given amount of a particular good. Consider for example your consumption of gol guppa - the mouth-watering small round-shaped puffed puris , served with tamarind ( imli )– water and fillings. 1 Imagine that you are hungry and have come to your favourite gol guppa vendor. Suppose that if you consume only one gol guppa you derive 20 units of pleasure or utility measured in some units. Let this (psychological) unit be called “utils.” Thus, the total utility from consuming one gol guppa is 20 utils. Suppose that you like gol guppa so much that eating just one increases your appetite for it. Let the second unit give an additional utility of 22 utils. Then, the total utility from
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This note was uploaded on 04/20/2010 for the course CEDT 601 taught by Professor Ypr during the Spring '00 term at Indian Institute of Technology, Kharagpur.

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Chap-2 - U N I T- I I CONSUMER BEHAVIOUR DEMAND AND 16...

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