Theory of Consumer Behaviour

2.1 Core concepts

• Utility = want-satisfying capacity of a commodity; the stronger the desire to have it, the greater the utility derived. Utility is subjective — it differs across individuals and changes with place and time (e.g., a room heater in Ladakh vs Chennai) (NCERT §2.1, p. 8).
• Cardinal Utility Analysis assumes utility can be expressed in numbers (e.g., "this shirt gives me 50 units of utility") (NCERT §2.1.1, p. 9).
• Total Utility (TU) of n units = total satisfaction from consuming n units of commodity x. Marginal Utility (MU) = change in TU due to one additional unit, MUn = TUn − TUn-1; and TUn = MU1 + MU2 + … + MUn (NCERT §2.1.1, p. 9).
• Law of Diminishing Marginal Utility: MU from each additional unit of a commodity declines as its consumption increases, keeping consumption of other commodities constant. When MU = 0, TU is at maximum; thereafter MU becomes negative and TU falls (NCERT §2.1.1, p. 10; Table 2.1).
• Demand curve from cardinal utility: Because each successive unit yields lower MU, the consumer will pay less for additional units — hence the demand curve slopes downward (NCERT §2.1.1, p. 10–11).
• Ordinal Utility Analysis: Consumer cannot measure utility in numbers but can rank bundles. Two-good bundles (x1 bananas, x2 mangoes) are compared via indifference curves (NCERT §2.1.2, p. 11).
• Indifference curve (IC): locus of all bundles giving the consumer the same level of satisfaction. Marginal Rate of Substitution (MRS) = |ΔY/ΔX| — quantity of mangoes the consumer foregoes for one extra banana, keeping utility constant (NCERT §2.1.2, p. 11).
• Law of Diminishing MRS: As bananas increase, MU of bananas falls and MU of mangoes rises, so the consumer sacrifices smaller and smaller amounts of mangoes for each additional banana (NCERT §2.1.2, p. 12, Table 2.2).
• Shape of IC: Diminishing MRS makes the IC convex to the origin. For perfect substitutes, MRS is constant and the IC is a straight line (NCERT §2.1.2, p. 12, Table 2.3).
• Monotonic preferences: Between two bundles, the consumer prefers the one with more of at least one good and no less of the other (NCERT §2.1.2, p. 13).
• Features of IC: (1) slopes downward (more of one good ⇒ less of the other to keep utility same); (2) higher IC = higher satisfaction (monotonicity); (3) two ICs never intersect — intersection produces contradictory rankings (NCERT §2.1.2, p. 13–14).
• Budget constraint: p1x1 + p2x2 ≤ M. The budget set = all bundles satisfying this; the budget line p1x1 + p2x2 = M = bundles costing exactly M (NCERT §2.2.1, p. 15).
• Budget line geometry: horizontal intercept M/p1, vertical intercept M/p2, slope = −p1/p2 (the price ratio). Slope measures the rate at which the consumer can substitute bananas for mangoes in the market (NCERT §2.2.1, p. 16–17).
• Shifts in budget line: Income change ⇒ parallel shift (outward if M rises, inward if M falls). Price of one good changes ⇒ budget line pivots around the other good's intercept — steeper if p1 rises, flatter if p1 falls (NCERT §2.2.2, p. 17–18).
• Consumer's optimum (ordinal): highest IC attainable given the budget set — occurs where the budget line is tangent to an IC, i.e., MRS = p1/p2 (slope of IC = slope of BL in absolute value). Optimum must lie on the budget line, not below it (NCERT §2.3, p. 19–20).
• Demand: quantity a consumer is willing to buy and is able to afford, given prices and income. Demand function X = f(P); graphical form = demand curve, generally downward-sloping (NCERT §2.4.1, p. 21–23).
• Two effects behind negatively-sloped demand: Substitution effect (cheaper good substituted for the other) and Income effect (price drop raises real purchasing power) (NCERT §2.4.2, p. 23–24).
• Law of Demand: other things equal, demand and price are negatively related (NCERT §2.4.2, p. 24).
• Linear demand: d(p) = a − bp for 0 ≤ p ≤ a/b; vertical intercept = a, slope = −b (NCERT §2.4.2, p. 24).
• Normal vs Inferior goods: for normal goods, demand moves in the same direction as income; for inferior goods, demand moves opposite to income (e.g., coarse cereals). Giffen good: income effect dominates substitution effect ⇒ demand rises with price (NCERT §2.4.3, p. 24–25).
• Substitutes and Complements: Demand for a good moves in the direction of the price of its substitute (tea–coffee) and opposite to the price of its complement (tea–sugar, pen–ink) (NCERT §2.4.4, p. 25).
• Shift vs Movement: a change in the good's own price ⇒ movement along the demand curve; change in income, prices of related goods or tastes ⇒ shift of the demand curve. Normal good + income rise ⇒ rightward shift; substitute's price rise ⇒ rightward shift; complement's price rise ⇒ leftward shift (NCERT §2.4.5–2.4.6, p. 25–26).
• Market demand = horizontal summation of individual demand curves at each price (NCERT §2.5, p. 26–27).
• Price elasticity of demand: eD = (% change in quantity demanded) / (% change in price) = (ΔQ/Q) × (P/ΔP). Always negative for a normal downward-sloping demand curve, but the absolute value is reported (NCERT §2.6, p. 27–28).
• Degrees of elasticity: |eD| < 1 → inelastic (essentials); |eD| > 1 → elastic (luxuries); |eD| = 1 → unitary elastic; vertical demand curve → perfectly inelastic (eD = 0); horizontal demand curve → perfectly elastic (eD = ∞); rectangular hyperbola → unitary elastic at every point (NCERT §2.6 + §2.6.1, p. 28–31).
• Elasticity along a linear demand curve q = a − bp: eD = −bp/(a−bp). At p = 0, eD = 0; at q = 0, eD = ∞; at p = a/(2b) (midpoint), eD = 1; elasticity > 1 above the midpoint, < 1 below the midpoint (NCERT §2.6.1, p. 29–30).
• Geometric measure: elasticity at a point on a straight-line demand curve = lower segment ÷ upper segment (eD = DA/DB) (NCERT §2.6.1, p. 30).
• Determinants of elasticity: (i) nature of the good — necessities are inelastic, luxuries are elastic; (ii) availability of close substitutes — easy substitutes ⇒ elastic; few substitutes ⇒ inelastic (NCERT §2.6.2, p. 31).
• Elasticity and Expenditure (Total Revenue method): When price rises — if good is elastic, expenditure falls; if inelastic, expenditure rises; if unit-elastic, expenditure unchanged. Expenditure moves opposite to price for elastic goods and same direction for inelastic goods (NCERT §2.6.3, p. 31–32, Table 2.5).

2.2 Definitions to memorise

2.3 Diagrams / processes to remember

• Figure 2.1 (p. 10): TU and MU schedule — MU diminishes from 12 → 6 → 4 → 2 → 0 → −2; TU peaks when MU = 0.
• Figure 2.2 (p. 10): Downward-sloping individual demand curve derived from diminishing MU.
• Figure 2.3 (p. 11): Convex-to-origin indifference curve through bundles A, B, C, D.
• Figure 2.4 (p. 13): Straight-line IC for perfect substitutes (five-rupee notes vs coins).
• Figure 2.5 (p. 13): Indifference map — family of non-intersecting ICs; arrow points to higher IC = higher utility.
• Figure 2.8 (p. 14): Why two ICs cannot intersect — contradiction at the intersection point.
• Figure 2.9 (p. 16): Budget line p1x1 + p2x2 = M with intercepts M/p1 and M/p2.
• Figure 2.10 (p. 18): Parallel shifts of the budget line with income changes.
• Figure 2.11 (p. 19): Pivot of the budget line when only p1 changes.
• Figure 2.12 (p. 20): Consumer's optimum — tangency of budget line with highest attainable IC at (x1*, x2*).
• Figure 2.14 (p. 23): Derivation of demand curve from successive optima as p1 falls.
• Figure 2.16–2.17 (p. 26): Shifts in demand vs movement along the demand curve.
• Figure 2.18 (p. 27): Horizontal summation of individual demand curves to get market demand.
• Figure 2.19 (p. 29): Variable elasticity along a linear demand curve — eD = 1 at midpoint, > 1 above, < 1 below.
• Figure 2.20 (p. 31): Constant elasticity curves — (a) vertical (perfectly inelastic), (b) horizontal (perfectly elastic), (c) rectangular hyperbola (unitary elastic).

2.4 Common confusions / NTA trap points

• Shift vs movement: A change in the good's own price causes a movement along the demand curve, NOT a shift. NTA frequently plants "rise in price" as a shift-distractor.
• MRS vs slope of BL: MRS is the rate the consumer is willing to substitute (IC slope); price ratio is the rate the consumer is able to substitute (BL slope). Optimum equates the two.
• Income elasticity sign for inferior good: demand falls when income rises — students forget the "opposite direction" rule for inferior goods.
• Sign convention of eD: Strictly negative for a normal good, but NCERT uses the absolute value when classifying elastic / inelastic. Trap option often states a positive elasticity is wrong.
• Linear demand curve elasticity: A common mistake is to claim elasticity is constant along a linear demand curve. It is not — it varies from ∞ (price-axis end) through 1 (midpoint) to 0 (quantity-axis end).
• Perfectly elastic ≠ unitary elastic: Perfectly elastic = horizontal, eD = ∞. Unitary elastic = rectangular hyperbola, eD = 1.
• Giffen vs inferior: All Giffen goods are inferior, but not all inferior goods are Giffen — Giffen requires the income effect to dominate the substitution effect.