3
QUICK
1. Consumer is a person who takes decisions about what to consume and how much to consume for the
satisfaction of his wants.
2. Utility: The want satisfying power of a commodity is known as utility. The units of measurement of utility is
called Utility.
3. Marginal Utility: The additional or extra utility received from consuming each additional unit of the
commodity is called marginal utility.
MU = TUn - TUn - 1
4. Total Utility: Total utility is the sum of marginal utilities. The more units of a commodity, a consumer
consumes per unit of time, the greater is the total utility he obtains.
5. Measurement of Utility: Utility derived from the consumption of any commodity can be measured in
cardinal number such as 1, 2, 3, 4, 5, etc. According to Hicks, utility can only be measured in ordinal numbers
such as 1st , 2nd , 3rd , 4th , 5th etc.
6. Relationship between Total Utility and Marginal Utility:
(i) When MU falls, but remains positive, TU increases.
(ii) When MU is zero, TU is maximum and constant
(iii) When MU is negative, TU declines.
7. Law of Diminishing Marginal Utility: According to this law, as the amount consumed of a commodity
increases, the utility derived by the consumer from the additional units (i.e. ,_marginal utility) goes on
diminishing,,
8. Assumptions of the Low of DMU:
(i) A consumer should be a rational, i,e. he should be willing to maximize his satisfaction.
(ii) The goods should be homogeneous,' i.e., it 'should be same in every aspect, e.g., colour, taste, size, etc,.
(iii) The unit of the goods must be standard, e.g., a glass of water not a cup of water.
(iv) There should be no change in the taste and preferences of the consumer during the process of consumption.
(v) Utility can be measured ,by absolute numbers. , , ,, n
(vi) There must be a continuity in consumption and if break is needed it should be very short.
9. Reasons behind Operation of Law:
(i) Intensity of Desire: According to this when more and more units of a commodity are consumed the
consumer intensity of desire to consume that commodity decreases and the utility derived from additional unit
also decreases
(ii) Priority to Important Use: If there are many uses of the commodity, the most urgent requirement will be
fulfilled first followed by next important use and so on, e.g. , electricity. _
10 Exceptions to the Law:
Law of DMU is not applicable in the following cases:
,(i) Hobbies (ii) Goods of display
(iii) Intoxicants (iv) Money
(v) Good books poetry (vi) Rare goods, etc.
11. Marginal Utility of Money: It refers to worth of a unit of money to a consumer. It implies the utility that a
consumer expects to obtain from a standard basket of goods that he can purchase by spending a unit of money.
12. Consumers Equilibrium: Utility approach under one commodity case:
Consumer's equilibrium is attained when the marginal utility in terms of money is equal to the price.
MUx = Px. Two commodities case : MUx /Px = MUy/Py
13. Law of Equi-marginal: The law of equi-marginal utility states; if a person has a thing which he can put to
several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all.
14. Limitations of the Law of Equi-marginal Utility:
(i) Utility cannot be measured. Thus, it is very difficult for the consumer to know the utility derived from a
commodity.
(ii) Habits and custom play a very important role for consumers. Thus, their decisions regarding buying
commodity are mainly governed by habits and customs instead of utility.
(iii) Many consumers are ignorant regarding equilibrium positions and utility derived from the commodities.
(iv) The demand for expensive and indivisible goods cannot be adjusted easily. Thus, it is not possible to equate
the MU on it.
(v) Marginal utility of money is not constant. As the consumer spends more and more of his income in buying
more and more units of the commodity the marginal utility of money income rises.
15. Relationship between the Marginal Utility Curve and the Demand Curve: The marginal utility curve itself
is the demand curve. The demand curve is downward sloping because of the law of diminishing marginal
utility.
16. Indifference Curve Approach: This approach was given by Prof. Hicks and Allen. According to this
approach, utility is ordinal i.e., utility cannot be measured in cardinal numbers such as 1, 2, 3, etc. It can be
measured in ordinal numbers such as 1st, 2nd, 3rd, etc. '
17. Indifference Curve: It shows different combinations of two goods that provide the same level of utility or
satisfaction to the consumer. The consumer preferences can be represented by a family of indifference ,curves
known as indifference map.
18. Properties of Indifference Curve:
(i) An indifference curve always slopes downward from left to right.
(ii) Indifference curve is convex to the origin.
(iii) Higher indifference curve gives higher level of satisfaction.
(iv) Two indifference curves never intersect each other.
19. Marginal Rate of Substitution: It is the rate at which consumer sacrifices one commodity to consume some
units of the other commodity to keep the level of satisfaction same. It can be calculated as : MRS = Change in
X/Change in Y.
20. Budget Line: It shows different possible combinations of goods which a consumer can buy with his given
income and price of goods. The consumer cannot afford to buy any combination of two goods that lies outside
his budget line.
21. Budget Set: All combinations of two goods that lie on or below the budget line constitute the budget set.
22. Condit ions of Consumer's Equilibrium: Indifference Curve Approach:
(i) Budget line should be tangent to the indifference curve.
(ii) MRS xy= Px/ Py
, (iii) MRS should be diminishing at the point of equilibrium.
1 MARK QUESTIONS
A. FILL IN THE BLANKS
1. Want satisfying power is termed as ____
2- At 'point of satiety' marginal utility is ____
3. For a consumer to be in equilibrium, consuming one commodity, MUx = ____
4- When total utility is maximum, marginal utility is ____
5. When marginal utility becomes negative, TU ____
6. When only one unit of a commodity is consumed, MU = ___
7. If MUx = 80 utils and MUy = 60 utils, the price of X at equilibrium is Rs 4 then price of Y will be ___
8. At 'point of satiety' marginal utility curve intersects ____ axis.
9. Slope of budget line, in case of X and Y is estimated by ___
10. For consumer to be in equilibrium MRSxy = ___
11. Indifference curve is ____ sloping and ____ to the origin.
12. Indifference curve is convex to the origin due to ___
13. At equilibrium, slope of budget line = ___
14. The consumer is in equilibrium consuming two goods X and Y. The price of X falls, consumer will buy less
of ____.
15. A set of indifference curves is called ___
16. Budget line can shift due to change in ____ or ___
17. Two indifference curves ____ intersect.
18. Indifference curve is convex to the origin because of ___
19. In case of equi-marginal utility, the condition of equilibrium= ___
20. When MU can be measured, added or subtracted is known as ___
21. When MU of two goods can be compared, it is known as ___
22. Indifference curve is also known as ___
23. Price line is alternatively known as ___
24. Monotonic preference refers to when a consumer gets ___
25. If MRS is rising throughout, the indifference curve will be ___
ANSWERS
1. Utility 2. Zero 3. Px 4. Zero
5. Starts falling 6. TU 7. 3 8. X-axis
9. Px/Py 10. Px/Py 11. Downward sloping, 12. DMRS
convex
13. Slope of the 14. Commodity Y 15. Indifference map 16. Income, price of
indifference curve goods
17. Never 18. DMRS 19. MUx / Px = MUy / 20. Cardinal utility
Py=MUM
21. Ordinal Utility 22. Iso-utility curve 23. Budget line 24. More of one
commodity but no
less of the other
commodity
25. Concave to the origin
QUICK
1. Consumer is a person who takes decisions about what to consume and how much to consume for the
satisfaction of his wants.
2. Utility: The want satisfying power of a commodity is known as utility. The units of measurement of utility is
called Utility.
3. Marginal Utility: The additional or extra utility received from consuming each additional unit of the
commodity is called marginal utility.
MU = TUn - TUn - 1
4. Total Utility: Total utility is the sum of marginal utilities. The more units of a commodity, a consumer
consumes per unit of time, the greater is the total utility he obtains.
5. Measurement of Utility: Utility derived from the consumption of any commodity can be measured in
cardinal number such as 1, 2, 3, 4, 5, etc. According to Hicks, utility can only be measured in ordinal numbers
such as 1st , 2nd , 3rd , 4th , 5th etc.
6. Relationship between Total Utility and Marginal Utility:
(i) When MU falls, but remains positive, TU increases.
(ii) When MU is zero, TU is maximum and constant
(iii) When MU is negative, TU declines.
7. Law of Diminishing Marginal Utility: According to this law, as the amount consumed of a commodity
increases, the utility derived by the consumer from the additional units (i.e. ,_marginal utility) goes on
diminishing,,
8. Assumptions of the Low of DMU:
(i) A consumer should be a rational, i,e. he should be willing to maximize his satisfaction.
(ii) The goods should be homogeneous,' i.e., it 'should be same in every aspect, e.g., colour, taste, size, etc,.
(iii) The unit of the goods must be standard, e.g., a glass of water not a cup of water.
(iv) There should be no change in the taste and preferences of the consumer during the process of consumption.
(v) Utility can be measured ,by absolute numbers. , , ,, n
(vi) There must be a continuity in consumption and if break is needed it should be very short.
9. Reasons behind Operation of Law:
(i) Intensity of Desire: According to this when more and more units of a commodity are consumed the
consumer intensity of desire to consume that commodity decreases and the utility derived from additional unit
also decreases
(ii) Priority to Important Use: If there are many uses of the commodity, the most urgent requirement will be
fulfilled first followed by next important use and so on, e.g. , electricity. _
10 Exceptions to the Law:
Law of DMU is not applicable in the following cases:
,(i) Hobbies (ii) Goods of display
(iii) Intoxicants (iv) Money
(v) Good books poetry (vi) Rare goods, etc.
11. Marginal Utility of Money: It refers to worth of a unit of money to a consumer. It implies the utility that a
consumer expects to obtain from a standard basket of goods that he can purchase by spending a unit of money.
12. Consumers Equilibrium: Utility approach under one commodity case:
Consumer's equilibrium is attained when the marginal utility in terms of money is equal to the price.
MUx = Px. Two commodities case : MUx /Px = MUy/Py
13. Law of Equi-marginal: The law of equi-marginal utility states; if a person has a thing which he can put to
several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all.
14. Limitations of the Law of Equi-marginal Utility:
(i) Utility cannot be measured. Thus, it is very difficult for the consumer to know the utility derived from a
commodity.
(ii) Habits and custom play a very important role for consumers. Thus, their decisions regarding buying
commodity are mainly governed by habits and customs instead of utility.
(iii) Many consumers are ignorant regarding equilibrium positions and utility derived from the commodities.
(iv) The demand for expensive and indivisible goods cannot be adjusted easily. Thus, it is not possible to equate
the MU on it.
(v) Marginal utility of money is not constant. As the consumer spends more and more of his income in buying
more and more units of the commodity the marginal utility of money income rises.
15. Relationship between the Marginal Utility Curve and the Demand Curve: The marginal utility curve itself
is the demand curve. The demand curve is downward sloping because of the law of diminishing marginal
utility.
16. Indifference Curve Approach: This approach was given by Prof. Hicks and Allen. According to this
approach, utility is ordinal i.e., utility cannot be measured in cardinal numbers such as 1, 2, 3, etc. It can be
measured in ordinal numbers such as 1st, 2nd, 3rd, etc. '
17. Indifference Curve: It shows different combinations of two goods that provide the same level of utility or
satisfaction to the consumer. The consumer preferences can be represented by a family of indifference ,curves
known as indifference map.
18. Properties of Indifference Curve:
(i) An indifference curve always slopes downward from left to right.
(ii) Indifference curve is convex to the origin.
(iii) Higher indifference curve gives higher level of satisfaction.
(iv) Two indifference curves never intersect each other.
19. Marginal Rate of Substitution: It is the rate at which consumer sacrifices one commodity to consume some
units of the other commodity to keep the level of satisfaction same. It can be calculated as : MRS = Change in
X/Change in Y.
20. Budget Line: It shows different possible combinations of goods which a consumer can buy with his given
income and price of goods. The consumer cannot afford to buy any combination of two goods that lies outside
his budget line.
21. Budget Set: All combinations of two goods that lie on or below the budget line constitute the budget set.
22. Condit ions of Consumer's Equilibrium: Indifference Curve Approach:
(i) Budget line should be tangent to the indifference curve.
(ii) MRS xy= Px/ Py
, (iii) MRS should be diminishing at the point of equilibrium.
1 MARK QUESTIONS
A. FILL IN THE BLANKS
1. Want satisfying power is termed as ____
2- At 'point of satiety' marginal utility is ____
3. For a consumer to be in equilibrium, consuming one commodity, MUx = ____
4- When total utility is maximum, marginal utility is ____
5. When marginal utility becomes negative, TU ____
6. When only one unit of a commodity is consumed, MU = ___
7. If MUx = 80 utils and MUy = 60 utils, the price of X at equilibrium is Rs 4 then price of Y will be ___
8. At 'point of satiety' marginal utility curve intersects ____ axis.
9. Slope of budget line, in case of X and Y is estimated by ___
10. For consumer to be in equilibrium MRSxy = ___
11. Indifference curve is ____ sloping and ____ to the origin.
12. Indifference curve is convex to the origin due to ___
13. At equilibrium, slope of budget line = ___
14. The consumer is in equilibrium consuming two goods X and Y. The price of X falls, consumer will buy less
of ____.
15. A set of indifference curves is called ___
16. Budget line can shift due to change in ____ or ___
17. Two indifference curves ____ intersect.
18. Indifference curve is convex to the origin because of ___
19. In case of equi-marginal utility, the condition of equilibrium= ___
20. When MU can be measured, added or subtracted is known as ___
21. When MU of two goods can be compared, it is known as ___
22. Indifference curve is also known as ___
23. Price line is alternatively known as ___
24. Monotonic preference refers to when a consumer gets ___
25. If MRS is rising throughout, the indifference curve will be ___
ANSWERS
1. Utility 2. Zero 3. Px 4. Zero
5. Starts falling 6. TU 7. 3 8. X-axis
9. Px/Py 10. Px/Py 11. Downward sloping, 12. DMRS
convex
13. Slope of the 14. Commodity Y 15. Indifference map 16. Income, price of
indifference curve goods
17. Never 18. DMRS 19. MUx / Px = MUy / 20. Cardinal utility
Py=MUM
21. Ordinal Utility 22. Iso-utility curve 23. Budget line 24. More of one
commodity but no
less of the other
commodity
25. Concave to the origin
