Introduction and Theory of Consumer Behaviour

About this unit

This unit opens microeconomics, the study of how individual consumers, producers and markets make choices. It begins with scarcity and the central problems every economy faces, then moves to the consumer: how a person with limited income decides what to buy. You meet two ways of studying this choice, the utility approach and the budget-and-preferences approach, and then the idea of demand and how strongly demand reacts to price. These tools are used in every later unit on production, markets and prices.

Key ideas

• Scarcity forces choice; the central problems are what, how and for whom to produce.
• The production possibility curve shows trade-offs and opportunity cost.
• Marginal utility falls as more of a good is consumed.
• A consumer's budget line shows all bundles that cost exactly the income.
• The optimum bundle is where the budget line touches the highest indifference curve.
• Demand depends on price, income, prices of related goods and tastes.
• Price elasticity measures the responsiveness of quantity demanded to price.

How to prepare

Learn the equilibrium conditions (MUx/Px = MUm and MRS = Px/Py) and the budget line equation by heart. Practise drawing the PPC, demand curve shifts and the three elasticity cases. Expect short numericals on marginal utility, budget sets and elasticity, plus concept questions on movement versus shift of demand.