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Unit-7: Recent Developments in Demand Theory

price B, affect of substitution related to specialities has been created because consumer substitutes Notes
juiciness in place of sweetness when it substitutes GG juiciness more than brand C to less sweetness FF .
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If the price of brand B increases to that stage when budget line becomes a line XZ, the consumer will
buy brand A and C combination and will not buy brand B. As a result, brand B will be out of market
due to excess of price producer brand B can get market again to reduce their price when it lies on ray
OB at any point budget line XZ.

Self Assessment

State whether the following statements are True/False:
8. Indirect utility function is drawn by indirect neutral curves.
9. High indirect neutral curves are related to low utility stages.
10. Consumer expenditure function explains how consumer expends.
11. The aim of consumers is to minimize his utility with a combination group of specialty.
12. In Lancaster’s theory, there can be explanation about the change in price of brand of a commodity
on consumer demand and selection of specialty.

The Income Effect
Affect of demand of brand or commodity or change in income in consumer, given price of it, it can be
described by specialty theory which is shown in Fig. 7.10. For simplifying the analysis only two brands B and
C are taken while its price is given. At initial stage, consumer is on equilibrium on point E when budget line
YZ is its touches neutral curve I . He buys OF of B (= GE)and OG of C (= FE) specialty brand combination.
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Suppose his income increases by which point Y goes to Y on line OB and on ray OC point Z increases to Z .
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Now its new equilibrium is on point F where budget line Y Z touches high neutral curve I . Due to increase
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in income he buys high specialty brand mixture of OF (= G E ) of B and OG (= F E ) of C. So, the effect of
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increased income of consumer is that he buys more quantity of both brands and maximizes its utility.
There will be opposite affects of decrease in consumer's income.
Fig. 7.10
B
Sweetness Y Y 1 E 1

E I 2 C
F
1 Z
F I 1
Z 1
G
G 1
O Juiciness

Change in Quantity of Brand or Commodity

On behaviour of customer the demand of speciality theory describes the effect of change in quality of a
brand or commodity. Suppose that there are only two brands A and B of an apple where sweetness and

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