Theory of Consumer Behaviour Class 12 Notes Economics Part A Chapter 2

Lesson at a Glance

Utility: The term utility refers to the want satisfying ability of a commodity. It is assumed to be measured in numbers, like 1,2,3,4, etc. These numbers are called unit or units of utility. Utility is a subjective concept and differs from person to person, place to place and time to time.

Total Utility: It is the sum total of utility derived from the consumption of all the units of a commodity.

Marginal Utility: It refers to additional utility due to consumption of an additional unit of a commodity.

Law of Diminishing Marginal Utility: Law of diminishing marginal utility (DMU) states that as more and more units of a commodity are consumed continuously, the utility derived from each successive unit goes on decreasing. Law of DMU has universal applicability and applies to all goods and services. It should be noted that it is marginal utility that keeps falling not the total utility.

Attainment of Equilibrium in case of two commodities/ Law of Equi-Marginal Utility: The law of equi-marginal utility states that, other things being equal, a consumer gets maximum total utility from spending his given income, when he allocates his expenditure to the purchase of different goods in such a way that the marginal utilities derived from the last unit of money spent on each item of expenditure tends to be equal. Symbolically,
MUm = MUx/Px, Where MUm is marginal utility of money; MUx is marginal utility of good X and Px is price of good X.

• Meaning of Indifference Curve: When a consumer consumes various goods and services, then there are some combinations, which give him exactly the same total satisfaction. The
graphical representation of such combinations is termed as indifference curve. “Indifference curve refers to the graphical representation of various alternative combinations of the goods, which provide same level of satisfaction to the consumer.”

• Properties of IC: (i) They are convex to the origin; (ii) they are downward sloping; (iii) a higher indifference curve shows higher level of satisfaction.

• Budget Line: As a higher Indifference Curve gives a higher level of satisfaction, a consumer will always wish to reach at the highest possible Indifference Curve. It is the budget line which is a constraint. To obtain more and more satisfaction, he has to work under two constraints:
(i) He has to pay the prices of two goods.
(ii) He has limited money income.

Conditions of Consumer Equilibrium by IC approach:

According to IC Approach a consumer will be in equilibrium
when two conditions are satisfied:

  1. Budget line should be tangent to Indifference curve i.e. MRSxy=Px/Py When MRSxy is less or greater than the price ratio between the two goods, it is advantageous for the consumer to substitute one good for the other.
  2. The second order condition must also be fulfilled at the point of equilibrium. At the point of tangency, Indifference Curve must be convex to the origin. To put it differently, MRSxy must be falling at the point of equilibrium.

• Demand: Demand is the quantity of a commodity that a consumer is willing and able to buy, at each possible price during a given period of time. In other words, demand is wiliness for a commodity backed by the purchasing power and will to part with that purchasing power.

Law of Demand: The law of demand states that, other things being equal, the demand for a good extends with a decrease in price and contracts with an increase in price. In other words, there is an inverse relationship between quantity demanded of a commodity and its price, provided other factors influencing demand remain unchanged. The term ‘other things being equal’ implies that income of the consumer, his tastes and preferences and prices of other related goods remain constant.

Change in Quantity Demanded: When change in quantity demanded of a commodity is caused by change in its price, it is called extension or contraction of demand or change in quantity demanded.

Change in Demand: A shift of the demand curve is caused by changes in factors other than price of the good. The factors are:

  1. Consumers’ income
  2. Price of other goods.
  3. Consumer’s tastes and preferences.

A change in any of these factors causes shift of the demand curve. It is also called change in demand. In a shift, a new demand curve is drawn. A shift of the demand curve can bring about:

  1. Increase in demand, or
  2. Decrease in demand

Elasticity of Demand: Elasticity of demand measures the extent to which quantity demanded of a commodity increases or decreases in response to increase or decrease in any of its quantitative determinants. Thus, by elasticity of demand, we mean the extent to which the quantity demanded of a commodity changes with change in its price or income of the consumer or price of related goods.
Elasticity of demand can be calculated as: Elasticity of demand

• Measurement of Elasticity of Demand: There are three methods of measuring Elasticity of Demand

  1. Percentage method;
  2. Expenditure method;
  3. Geometric Method

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