Class 12th – Microeconomics
Chapter 2: Theory of Consumer Behaviour
Ultra Revision – Detailed Notes prepared for MP Board & CBSE Board Exams
📘 Chapter 2: Theory of Consumer Behaviour
1. Consumer and Consumption
Consumer: An individual who buys goods and services for the satisfaction of personal wants.
Consumption: The act of using up goods and services to satisfy human wants.
📌 Main Objective of a Consumer: ✔ To achieve Maximum Satisfaction.
2. Utility
Utility is the power or capacity of a commodity to satisfy human wants.
- Utility is a subjective/psychological concept.
- It varies from person to person, place to place, and time to time.
- Utility is related to "usefulness" but not necessarily "morality."
Example: Liquor may be socially harmful, but it possesses utility for a consumer who desires it.
3. Types of Utility
(i) Total Utility (TU): The total satisfaction derived from consuming all possible units of a commodity.
(ii) Marginal Utility (MU): The change in total utility resulting from the consumption of one additional unit of a commodity.
Example: If TU at 2 units is 24 and TU at 3 units is 30, then MU = 30 - 24 = 6.
4. Relationship between TU and MU
- When TU increases → MU is positive.
- When TU is at its maximum (Point of Satiety) → MU is zero.
- When TU begins to decline → MU becomes negative.
5. Law of Diminishing Marginal Utility (DMU)
Statement: "As a consumer consumes more and more units of a specific commodity, the utility derived from each successive unit goes on diminishing."
🔹 Assumptions of the Law:
- Consumption must be continuous.
- Standard units of the commodity must be identical in quality/size.
- Consumer's income and taste must remain constant.
- The commodity must be a normal good.
6. Approaches to Utility Measurement
(A) Cardinal Utility Approach: Proposed by Prof. Marshall. It states that utility can be measured in numerical units (1, 2, 3...).
(B) Ordinal Utility Approach: Proposed by Hicks and Allen. It states that utility can only be ranked/compared (higher or lower) but not measured numerically.
7. Consumer’s Equilibrium
Consumer equilibrium is a state where a consumer derives maximum satisfaction by spending their limited income.
(A) Single Commodity Case: Condition: MUₓ = Pₓ
(B) Two Commodities Case: Condition (Law of Equi-Marginal Utility):
8. Budget Line
The budget line represents all possible combinations of two goods that a consumer can purchase with their given income and prices of goods.
Where M = Total Income, P = Price of goods.
9. Budget Set
A budget set is the collection of all bundles that the consumer can buy with their income at prevailing market prices (PxX + PyY ≤ M).
10. Indifference Curve (IC)
An Indifference Curve shows various combinations of two goods that provide the same level of satisfaction to the consumer.
🔹 Characteristics:
- IC slopes downward from left to right.
- It is Convex to the origin.
- Two ICs never intersect each other.
- A higher IC represents a higher level of satisfaction.
11. Marginal Rate of Substitution (MRS)
The rate at which a consumer is willing to substitute one good (Y) for another (X) while maintaining the same level of total satisfaction.
12. Consumer Equilibrium via IC and Budget Line
A consumer is in equilibrium when:
- The Indifference Curve is tangent to the Budget Line (MRSₓᵧ = Pₓ/Pᵧ).
- At the point of tangency, the IC must be convex to the origin.
13. Price Effect
The change in the quantity demanded of a commodity due to a change in its price, other things remaining constant.
14. Substitution Effect
When the price of a good falls, it becomes cheaper relative to other goods, inducing the consumer to substitute the expensive good with the cheaper one.
15. Income Effect
A fall in the price of a commodity increases the consumer's 'Real Income' (purchasing power), allowing them to buy more of the commodity.
16. Giffen Goods
These are highly inferior goods where the 'Law of Demand' fails. Demand for these goods increases when their price increases (e.g., coarse grains for the poor).
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