Revision: Consumption Analysis Economics HSC Arts Class 11 Tamil Nadu Board of Secondary Education

• Marshall: “Amount demanded increases with a fall in price and diminishes with a rise in price, other things being equal.”
• Samuelson: “People buy more at lower prices and less at higher prices, ceteris paribus.”
• Ferguson: “The quantity demanded varies inversely with price.”

 Cross elasticity of demand is the measure of the responsiveness of demand for a good to a change in the price of a related good.

`"Ec" = ("Proportionate change in quantity demanded of good X")/("Proportionate change in price of good Y")`

It is the measure of the degree of responsiveness of the demand for a good to the changes in its price. It is defined as the percentage change in the demand for a good divided by the percentage change in its price.

e_d = `"Percentage change in demand for good"/"Percentage change in price of that good"`

e_d = `(ΔQ)/(ΔP) xx P/Q`

Where ΔQ = Q₂ − Q₁, change in demand

ΔP = P₂ − P₁, change in price

P₁ = Initial price

Q₁ = Initial quantity

Price elasticity of demand tells us the amount of the change in the quantity demanded of a commodity in response to change in its price. In other words, it measures the degree of change of demand in response to changes in price.

• "Elasticity of demand may be defined as the percentage change in quantity demanded to the percentage change in price." - Alfred Marshall
• "The elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes." - A.K. Cairncross
• "Elasticity of demand is a technical term used by the economists to describe the degree of respensiveness of demand of a commodity to a change in its price." -Stonier and Hague
• Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in any of its determinants.

According to Hicks, "It is the locus of the points representing parts of quantities between which the individual is indifferent and so it is termed as an indifference curve."
According to Meyres, "An indifference curve may be defined as a schedule of various combinations of goods which will be equally satisfactory to the consumer concerned."
According to Ferguson, "An indifference curve is a combination of goods, each of which yields the same level of total utility for which the consumer is indifferent." According to Leftwich, "A single indifference curve shows the different combinations of X and Y that yield equal satisfaction to the consumer."

• Price Line/Budget Line shows all the combinations of two goods a consumer can purchase, given their total money income and market prices.​
• Ferguson: “The price line shows the combinations of goods that can be purchased if the entire money income is spent.”
• Prof. Hibdon: “The budget line shows all the different combinations of the two commodities that a consumer can purchase, given his money income and the price of the two commodities.”

D_x = f(P_x, P_n, Y, T)

Where D_x = Demand for commodity x,
P_x = Price of the commodity x,
P_n = Price of related commodities,
Y = Income of the consumer,
T = Taste.

Total Spending = (Food Units × Price of Food) (Clothing Units × Price of Clothing) = Budget

M = P_f  × Q_f + P_c × Q_c

• In this example: 20 × Q_f  + 40 × Q_c = 200

The law of demand states the inverse relationship between the price and quantity demanded of a commodity. According to this law, other things being equal, when the price of a commodity increases, its demand falls and when the price falls, demand increases. Note that the law of demand indicates only the 'direction' of change and not the ‘magnitude’ of change in demand. Further, there is no proportionate relationship between price and demand. If the price of a commodity rises by 20%, its demand may fall by any proportion (i.e. by more or less than 20%). Law of demand, thus, is a qualitative concept, as it does not indicate the magnitude of change in demand. It is important to note here that the law of demand states the effect of change in price on demand and not the effect of change in demand on price.

1. According to Marshall, “The amount demanded increases with a fall in price and diminishes with a rise in price.”
2. According to Bilas, “The law of demand states that other things being equal, the quantity demanded per unit of time will be greater, lower the price and smaller, higher the price.”

The law of demand states that, other things being equal, the quantity demanded of a good rises when its price drops and falls when its price increases. This shows an inverse relationship between a product’s price and the quantity consumers are willing to buy.

• The law of equi‑marginal utility explains how a rational consumer allocates limited income among many goods to get maximum satisfaction.​

  It states that a consumer reaches maximum satisfaction when the marginal utility per unit of money is equal for all goods, i.e. MU_A/P_A=MU_B/P_B=⋯=MUn/Pn.​

  This is an extension of the law of diminishing marginal utility to many commodities and is also called Gossen’s Second Law or the law of maximum satisfaction.​

   

• There is an inverse relation between price and quantity demanded.
• All other factors must remain constant for the law to apply.
• The demand curve always slopes downwards.

• Law of demand only shows direction (more or less), elasticity shows the degree (how much more or less).
• Some things (necessities) have inelastic demand; luxuries or goods with many substitutes have elastic demand.
• Alfred Marshall introduced this concept and the popular measurement formula.