Chapter # 3

Consumption and consumer’s

Behavior

1
 Utility
Utility
Different aspects of utility
1. Initial utility
2. Marginal utility
3. Positive utility
4. Satiety
5. Negative utility
6. Total utility

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 Utility
Units consumed(apples) Marginal utility (units) Total utility (units)
1 8 8
2 6 14
3 4 18
4 2 20
5 0 20
6 -2 18

3
 Law of diminishing marginal utility

Definition: The additional benefit which a

person derives from a given increase of his
stock of a commodity diminishes with every
increase in stock that he already has

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Law of diminishing marginal utility
Units of consumed Marginal utility Total utility
1 20 20
2 15 35
3 10 45
4 05 50
5 00 50
6 -5 45

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 Law of diminishing marginal utility
Assumptions of the law
1. Suitable units of consumption (same size)
2. Continuous use of the product (same time)
3. Nature of a product (same quality)
4. Stability of character of the consumer

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 Law of equi-marginal utility
There is one defect in the law of diminishing
marginal utility. This is that it only explains the
behavior of the consumer regarding a particular
commodity at each time. It does not explain the
consumer's behavior as a whole. Therefore, the law
of equi-marginal utility was developed which is an
extension of the law of diminishing marginal utility.
This is used for maximizing total utility. The
household maximizing its utility will allocate its
income among commodities so that the utility of
the last penny spent on each is equal

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 Law of equi-marginal utility
Let us suppose that a hypothetical consumer:
• has five rupees.
• wants to purchase oranges and 7up whose
price is Rs. 1 each.
• can measure utility in utils (e.g. 1,2,3etc)
• can divide both the items of consumption in
certain or suitable units of consumption
• consumer is a rational person

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Law of equi-marginal utility
Units of Money (Rs.) Oranges (M.U.) 7-up (M.U)
1 25 20
2 20 15
3 15 10
4 10 05
5 05 00

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 INDIFFERENCE CURVES
An indifference curve represents those various
combinations of two goods which will give equal
level of satisfaction to the consumer. Thus, an
indifference curve may be defined as “locus of all
the points representing various combinations of two
goods giving the same satisfaction amount which
the consumer is indifferent”. Each point on an
indifference curve gives the same total utility as any
other point on that same indifference curve does. If
these points are joined to form a curve, it will be
known as an indifference curve.

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INDIFFERENCE CURVES
Combination Good Y Good X MRS
A 20 ---- ----
B 15 1 5:1
C 11 2 4:1
D 8 3 3:1
E 6 4 2:1
F 5 5 1:1

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 INDIFFERENCE CURVES
Marginal rate of substitution: MRS is the rate at
which a consumer prefers to exchange successive
units of one good for another.

Hicks defines MRS of good Y for good X as the

quantity of Y which would just compensate the
consumer for the loss of marginal unit of X.

Briefly, it shows how much one good is substituted

for the other

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 INDIFFERENCE CURVES
Characteristic of the indifference curve
1. An indifference curve is not parallel to the horizontal
axis
2. Neither it is parallel to the vertical axis
3. An indifference curve cannot be a straight line
4. It cannot be concave to the origin
5. Indifference curves do not intersect each other

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 INDIFFERENCE CURVES
Characteristic of the indifference curve
1. An indifference curve is not parallel to the horizontal
axis
2. Neither it is parallel to the vertical axis
3. An indifference curve cannot be a straight line
4. It cannot be concave to the origin
5. Indifference curves do not intersect each other

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 BUDGET LINE:
With the given level of income being consumed on
apples and bananas, the quantities and prices of
both commodities in the market can be shown by a
Budget Line/Price Line.
1. Suppose, our hypothetical consumer has Rs. 10
to spend on apples and bananas.
2. Further suppose that the price of apples is Rs. 2
per unit and price of bananas is Rs. 1 per unit.

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BUDGET LINE:

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 BUDGET LINE:
With Rs. 10 he can buy 10 units of bananas (OM) and no apples
or 5 apples (ON) and no bananas as shown in diagram. By
joining MN , we get budget line/price line. This price line shows
all the possible combinations of apples and bananas that the
consumer can buy given an income of Rs. 10.
Thus, at point 'A' the consumer will be purchasing 2 units of
apples and 6 units of bananas, spending all the money, i.e. Rs.
10 on both commodities. Other things remaining the same, the
price of apples falls from Rs. 2 to Rs. 1 per unit, the price line
will shift from MN to MN'. On the other hand, if the income of
the consumer increases from Rs. 10/- to Rs. 12/- the price line
will shift from MN to LK. While prices of the commodities
remain the same.

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 Consumer’s Equilibrium
The consumer is in equilibrium position when he obtains maximum
possible satisfaction from his purchases, given that the prices of the
commodities in the market and the amount of money to be spent are in
correspondence with the following assumptions
1) The consumer is rational, i.e. he always tries to maximize utility
2) There is perfect competition in the market
3) Goods are homogeneous and perfectly divisible
4) The consumer has an indifference curve map, showing his scale of
preferences for various combinations of the two goods 'X' and ‘Y’
5) The consumer has fixed amount of money to spend on 'X' and 'Y'
goods
6) Prices of 'X' and 'Y' commodities are given

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Consumer’s Equilibrium

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