Consumer choice and elasticity

Choice under a budget constraint

Consumer behaviour studies how households choose among goods and services with limited resources. Preferences describe what a consumer values, while a budget constraint describes what is affordable at given prices and income. A consumer may prefer a combination without being able to buy it. Conversely, an affordable combination may not be the preferred one. The basic model separates those ideas so that a change in income or price can be analysed. It does not claim that every real person has perfect information or calculates a formula before each purchase.

Utility is satisfaction associated with consumption in the model. Total utility is overall satisfaction from the quantity consumed; marginal utility is the extra satisfaction from an additional unit. Diminishing marginal utility means that successive units can add less satisfaction, other relevant conditions unchanged. Total utility can still rise while marginal utility falls. If a first bottle of water gives 12 hypothetical utility units and a second gives 8, the total is 20 while the marginal utility of the second is 8. These numbers are teaching assumptions, not measurements of universal human feelings.

Allocating spending and understanding limits

In a simple divisible-goods model, a consumer allocates spending so that marginal utility per unit of money is equalised across goods at an interior optimum, subject to the budget. If the last naira spent on one good yields more marginal benefit than the last naira spent on another, shifting spending toward the first can improve the bundle. Corners, indivisible items and satiation can change the simple rule. A question using the rule should state or imply its assumptions. Do not equate total utilities instead of marginal utility per price.

A budget line for two goods shows combinations exhausting a given income. If income is ₦6,000, exercise books cost₦500 and pens cost₦250, the intercepts are 12 books or 24 pens. A bundle of 8 books and 8 pens costs₦6,000 and lies on the line. A bundle of 10 books and 10 pens costs₦7,500 and is unaffordable under those assumptions. A rise in income with both prices fixed shifts the feasible set outward. A change in one price alters relative affordability and changes the slope.

Price elasticity of demand

Price elasticity of demand measures the percentage responsiveness of quantity demanded to a change in its own price, with other influences held constant. Using an initial-value calculation, elasticity equals percentage change in quantity demanded divided by percentage change in price. Demand normally produces a negative signed value because quantity and price move in opposite directions along the curve. Textbooks often classify demand using the absolute magnitude: greater than 1 is elastic, less than 1 is inelastic and exactly 1 is unit elastic. State the convention used.

Suppose price rises from₦100 to₦110 and quantity demanded falls from 200 to 170. Using original values, quantity falls 15% and price rises 10%, giving elasticity−1.5, or magnitude 1.5. This is elastic demand over the stated change under that calculation. The midpoint method instead uses averages of the initial and final values as denominators and produces a different arc measure. Use the method requested and label it. A slope measured in units per naira is not itself elasticity, because elasticity is based on proportional changes.

Determinants and revenue effects

Close substitutes, the share of income spent, the time available to adjust and whether a good serves an essential purpose can influence elasticity. A product with many alternatives is often more responsive than a narrowly unavoidable purchase. However, a broad category and a particular brand can have different elasticities. Time matters because a household may have few immediate alternatives but can change habits or equipment later. These are tendencies to explain, not numerical values that can be assigned without evidence.

Total revenue equals price times quantity sold. Along elastic demand, a price rise tends to reduce revenue because the proportional quantity fall is larger than the proportional price rise. Along inelastic demand, a price rise tends to increase revenue. Unit elasticity is associated with no change in total revenue in the ideal comparison. Revenue is not profit; costs may also change. A firm cannot infer profitability from elasticity alone, and an observed rise in both price and sales may involve a demand shift rather than movement along a fixed curve.

Income and cross elasticity

Income elasticity is percentage change in quantity demanded divided by percentage change in income. A positive value indicates a normal good over the range studied; a negative value indicates an inferior good. A normal good with income elasticity greater than 1 is often called income-elastic or a luxury in the technical sense. The classification depends on the consumer group and income range. A product is not permanently inferior for every buyer because it is cheap, and luxury here does not necessarily mean an ornamental item.

Cross elasticity compares the percentage change in demand for one good with the percentage change in the price of another. A positive value is consistent with substitutes; a negative value is consistent with complements, within the model and evidence. If the price of one transport option rises and demand for another rises, substitution may explain the relationship. But observed correlation can also have other causes. Keep the two goods clearly named in the formula so that the denominator and numerator do not accidentally refer to the same product.

Supply responsiveness and self-check

Price elasticity of supply measures percentage change in quantity supplied divided by percentage change in price. Spare capacity, storage, production time and input mobility affect how quickly sellers can respond. Fresh farm output cannot always expand immediately after a price rise because crops take time to grow. Existing stocks may respond more quickly than new production. The supply curve's position concerns conditions at each price; elasticity concerns responsiveness along the relationship. A rightward shift is not automatically an increase in elasticity.

Self-check: quantity falls 10% after price rises 20%; demand elasticity magnitude is 0.5 and is inelastic under that calculation. Self-check: why does falling marginal utility not necessarily mean falling total utility? The additional units may still add positive satisfaction, just by a smaller amount. In an examination, identify the elasticity type, write the exact formula, use a consistent percentage method and interpret both the size and sign. Explain revenue separately from profit and preferences separately from affordability.