Compare the following two pairs of goods: ?bullet Coke and Pepsi ? Skis and ski bindings a. In which case are the two goods complements? In which case are they substitutes? b. In which case do you expect the indifference curves to be fairly straight? In which case do you expect the indifference curves to be very bowed? c. In which case will the consumer respond more to a change in the relative price of the two goods?

When discussing consumer behavior, it's important to consider the relationship between different goods. Complementary goods are products that are typically used together, such as skis and ski bindings in our example. Just like bread goes with butter, skis are rarely used without bindings. In terms of indifference curves, which are graphical representations of consumer preferences, complements lead to an L-shaped curve. This occurs because if you have one ski but no binding, additional skis don't increase utility without additional bindings.

Indifference curves are steep for one good and flat for the other, reflecting that you need both goods in tandem for them to be of any value. The curves are perfectly elastic for one good until its complement is exhausted and then become perfectly inelastic, accounting for the L shape.

On the other side of the spectrum, we find substitute goods, which serve a similar purpose and can be used in place of each other. Think of Coke and Pepsi from our example; consumers often see them as interchangeable soft drink options. Because of their substitutability, their indifference curves are straighter. This indicates that if the price of Coke increases, a consumer is likely to switch to Pepsi if it's cheaper, showing a higher price sensitivity.

Substitutes don't necessarily need to be identical; they just need to satisfy the same want or need for the consumer. This is significant in economic analysis because the ability to substitute one good for another can greatly affect market dynamics and consumer choices when prices change.

The concept of price sensitivity, or 'price elasticity of demand', plays a critical role in understanding consumer purchasing decisions. It reflects how much the quantity demanded of a good changes in response to a price change. When goods are substitutes, consumers are more price-sensitive because they can easily switch to a less expensive option without significantly altering their consumption habits. This is why, with Coke and Pepsi, even a small difference in price can lead to a large shift in demand from the more expensive to the less expensive option.

The degree of price sensitivity has vital implications for businesses as it affects pricing strategies, product positioning, and the potential success of promotions or price increases. Understanding price sensitivity helps predict consumer responses to market changes and tailor the marketing mix to maximize profitability.

Finally, discussing consumer behavior in economics is akin to exploring the engine of an economy. It encompasses the patterns of consumption, preferences, and economic decisions made by consumers. Indifference curves are a tool used to analyze consumer preferences, depicting combinations of goods that provide the same level of utility or satisfaction to the consumer.

Consumer choices are influenced by factors such as income, tastes, preferences, and the prices of goods and services. Economists study these behaviors to predict how changes in these factors will influence market demand for different products. For example, when relative prices shift, demand might change not only because of the direct price effect but also due to income effects or a change in the perceived value of the goods.