12th class Microeconomics Chapter 2: Theory of Consumer Behaviour (Utility Approach)

Chapter 2: Theory of Consumer Behaviour (Utility Approach)

1. Consumer

• Consumer is an economic agent who buys goods and services to satisfy wants.

2. Utility

• Meaning: The satisfaction a consumer gets from consuming a good/service.

Types of Utility:

1. Total Utility (TU): Total satisfaction from consuming given units.

2. Marginal Utility (MU): Extra satisfaction from consuming one more unit.

   MU=TUn−TUn−1MU = TU_n – TU_{n-1}MU=TUn​−TUn−1​

3. Law of Diminishing Marginal Utility (DMU)

• As more units of a commodity are consumed, marginal utility decreases.

• Example: Eating slices of pizza – satisfaction reduces with each extra slice.

4. Consumer’s Equilibrium (Utility Approach)

A consumer is in equilibrium when:

1. One Commodity Case

   • MUx = Px (in terms of money)

   • or MUxPx=MUofmoney\frac{MUx}{Px} = MU of moneyPxMUx​=MUofmoney

2. Two Commodity Case

   • MUxPx=MUyPy=MUm\frac{MUx}{Px} = \frac{MUy}{Py} = MU_mPxMUx​=PyMUy​=MUm​

   • Meaning: utility per rupee spent on all goods is equal.

5. Indifference Curve Approach (Alternative Theory)

(Though detailed in later chapters, it’s introduced here)

• Indifference Curve (IC): Shows different combinations of two goods giving same satisfaction.

• Budget Line: Represents all possible combinations a consumer can afford.

• Equilibrium Condition: Consumer is in equilibrium when:

  MRSxy=PxPyMRS_{xy} = \frac{Px}{Py}MRSxy​=PyPx​

  (Marginal Rate of Substitution = Price ratio).

6. Key Definitions

• Marginal Rate of Substitution (MRS): Units of Y a consumer is willing to sacrifice for 1 unit of X while keeping satisfaction same.

• Indifference Map: A set of indifference curves.