CA - CPT

The concept of 'Consumer surplus' was evolved by Alfred Marshal.

Elasticity of demand is classified into three kinds; Price Elasticity Demand, Income Elasticity Demand, and Cross Elasticity Demand.

Elasticity is zero, if there is no change at all in quantity demanded when price changes.

Consumer surplus cannot be measured precisely because it is difficult to measure marginal utilities of different units of a commodity, consumed by a person.

When income elasticity is greater than zero, then increase in income leads to increase in quantity demanded. This happens in case of the normal goods.

Elasticity is unitary, if % change in quantity demanded is equal to % change in the price.

According to Marshal, people will buy more quantity at lower price because they get lesser satisfaction from use of additional units of goods. So, a rationale consumer will not pay more for less satisfaction. He is induced to buy additional units in order to maximize his satisfaction. The diminishing marginal utility and equalizing it with the price is the cause for the downward sloping curve.

Indifference curve will slope downward to the right. This property implies that when the amount of one good in combination is increased, the amount of the other good is reduced. This is essential, if the level of satisfaction is to remain the same on an indifference curve.

Conspicuous Goods- Articles of prestige value are demanded by only the rich and these articles become more attractive when their prices go up. Such articles do not conform to the usual Law of Demand.

Conspicuous Necessities- The demand for certain goods is affected by the demonstration effect of the consumption pattern of the social group to which an individual belongs. These goods due to their constant usage have become necessities of life. For instance, when price of TV and AC have been continuously rising, demand of these articles do not show any tendency to fall.

Speculative Goods- In speculative market, more will be demand when prices are rising and lesser will be demand when prices decline. This leads to failure of Law of Demand.

Complementary goods are those goods, which are consumed together or simultaneously, e.g. tea & sugar, automobile & petrol. When commodities are complementary, a fall in the price of one (other things being equal) will cause the demand of the another to rise.

When the price of a commodity falls, the consumer can buy the same quantity of the commodity with less money. This is called income effect.

If two goods are perfect substitutes for each other, the cross elasticity is infinite. If goods are unrelated, the cross elasticity is zero.

Sir Robert Giffen, an economist, was surprised to find that as the price of bread increased, British workers purchased more bread rather than less. This was something against the law of demand. The reason given for this is when the price of bread went up, it caused such a large decline in purchasing power of the poor that they were forced to cut down the consumption of meat and other expensive eatables. Since bread, even at its highest price, was still the cheapest food article, people consumed more of it and not less when its price went up. Such goods which exhibit direct price-demand relationship are called Giffen Goods.

Some consumers measure the utility of a commodity by its price. If commodity is expensive, it is said to get more utility. Such articles do not conform to the usual law of demand. This was formulated by Veblen in his Doctrine of “Conspicuous Consumption”.

Complementary goods are those goods which are consumed together. Competing goods or substitutes are those goods, which can be used with ease in place of another. There are certain commodities for which quantities demanded decrease with an increase in income. These goods are called inferior goods.