THE HYDERABAD PUBLIC SCHOOL, BEGUMPET

CLASS: 12
SUBJECT: Economics

TOPIC: Theory of consumer behavior:

Marginal utility and Indifference curve
analysis
PRESENTER: Mr. K.S.Sumita
• Two approaches to understand consumer behavior to understand
the principles behind law of demand
• Cardinal Utility : utility can be measured in term of utils
Law of Diminishing Marginal Utility
Law of Equi marginal Utility

• :Ordinal Utility : in ordinal utility only utility can be ranked

Indifference curve analysis
Utility
• Utility is subjective
• Utility is not measurable
• Utility is different from usefulness
• Utility is relative in nature
• Total Utility : It is the satisfaction derived by consuming all units.
TUn =MU1 + MU2 +………..MU n
• Marginal Utility : It is the satisfaction derived by consuming
additional unit.
MU= TUn - TUn-1
TUn is the satisfaction derived from the last unit and TUn-1 is the
satisfaction derived from the preceding unit
Law of Diminishing Marginal utility
• It was formulated by H.H.Gossen but was given systematic formulation
by Alfred Marshall” The law states that as the amount consumed of a
commodity increases, other things being equal ,the utility derived by
the consumer from the additional units i.e. marginal utility, goes on
decreasing’
• Assumptions - ( sometime you are tested for assumptions for 2marks)
• Identical/Homogenous - the law holds true when the units are of same
size,taste,flavour
• Standard size-neither too big nor too small
• Taste-consistent
• Continuity- The consumption process should be continues,units should
be taken continuously without any time interval.
• Utility is measurable- utility can be measured in terms of utils.
Explanation of DMU
unit tu mu

1 8 8

2 15 7

3 19 4

4 19 0

5 17 -2
Graph
Relationship between Total Utility and Marginal Utility

• When total utility increases Marginal utility decreases

• When total utility is maximum Marginal utility is Zero

• When total utility is falling marginal utility is negative

1) statement of law
2) Assumptions of law
3) tabulation of law
4) graph explanation
unit
TU MU

1 10 10
2 16 6
3 20 4

4 22 2

5 22 0
6 20 -2
 Consumer’s Equilibrium through Cardinal Utility
approach –One commodity case

Assumptions

⮚Consumer is assumed to be rational

⮚Cardinal utility
⮚Law of DMU operates
⮚Utility of each unit of money remains to be constant
⮚Tastes and preference is assumed to remain constant
Consumers equilibrium is attained when Mux = PUx .Price of the
commodity is assumed to be 600.

Units of shirt Marginal utility

1 700

2 650

3 600

4 500

5 350

A consumer buys 1 st shirt because his MU is greater than price, even he buys second shirt
because still his utility is greater than price.When he buys 3 rd shirt ,his MU is equal to price .So
this is the equilibrium. he will not buy 4th shirt because his MU is less then price
Numericals
The following table shows the MU derived from the purchase of
book.the price of the book is 500. draw a diagram to explain consumers
equilibrium

No.of books MU

1 700

2 600

3 500

4 400

5 300
 Law of Equi Marginal Utility
• ‘The Utility maximizing consumer must allocate his/her
income among various commodities in such a way that the
last unit of money (rupee) spent on each commodity gives
him/her the same marginal utility’
• Mux = MUy = MUz = MU per unit of money income
Px Py Pz
Suppose a consumer has 10 to spend on three commodities X,Y and Z. Each of
these is priced at Rs 1. MU schedules of X, Y and Z are shown as follows

by spending 5rs on X commodity ,3rs on Y commodity and 2rs on Z commodity consumer gets
maximum satisfaction
Income is 20 .price of orange is 4 and apple is
2
units muo MU a muo/po mua/pa

1 33 36 8.25 18
2 30 32 7.5 16
3 27 28 6.75 14
4 24 24 6 12
5 21 20 5.25 10
6 18 16 4.5 8
@ 2 nd combination is optimum combination
 Consumer has 24 rs and the price of goodX is RS2 and good y is rs 3

units MUx MUy MUX/PX MUx/PX

1 20 24 10 8
2 18 21 9 7
3 16 18 8 6
4 14 15 7 5
5 12 12 6 4
6 10 9 5 3