The person who decides what to buy to satisfy the needs of both as an individual and as a member of a household is called a consumer.

a person who consumes goods and services to satisfy his needs
A consumer is a rational .
A consumer who seeks to maximize utility or satisfaction by spending his income on goods and services is a rational consumer.

Introduction of Micro Economics

Utility :- The quality or power found in an object, which satisfies human needs, is called utility of that object. The unit of measurement of utility is the util. Utility differs from person-to-person, place-to-place and time-to-time.

Total utility :- The sum of utility obtained by consuming all the units of a commodity is called total utility. In other words, total utility is the sum of marginal utility.

Total utility refers to the total satisfaction derived from the consumption of all possible units of a commodity. It measures the total satisfaction derived from the consumption of all the units of that commodity.

TUx = MUx

TU = U1 +U2 + U3 +………..UN Here U1 is the utility obtained from the first unit of the commodity, U2 from the second, U3 from the third, etc.

Marginal Utility:

Marginal utility is the derived from the last unit of a commodity consumed.
The change in total utility caused by the consumption of one additional unit of a commodity is called marginal utility.
Marginal utility is the increase in total utility when one more unit of the commodity is consumed. It is the utility derived from the last unit of the commodity consumed
MUx = TUn- TUn-1
MU is the rate of change in TU when one more unit is consumed or MU = TU/∆Q

Law of Diminishing Marginal Utility :-

This law is a psychological law that generally applies to all things created by humans. According to this law, as more and more units of a commodity are consumed, the marginal utility derived from each additional unit decreases. This tendency is called the diminishing utility law or basic psychological law.

Law of Diminishing Marginal Utility :- As we consume more units of a commodity, each successive unit consumed gives lesser and lesser satisfaction, that is marginal utility (MU) diminishes.

Assumptions of diminishing marginal utility:-
Cardinal utility : It is believed that utility or satisfaction can be measured quantitatively and can be expressed in quantitative terms i.e. utilities.

There is no time gap between the consumption of units of the commodity, i.e., the consumption of different units is done continuously. and a fixed unit of the commodity be used.
The consumer is rational and his interest, fashion etc. do not change during the consumption of different units of the commodity.

Utility Schedule

Units of X good	Marginal Utility from X (Utils)
1	10
2	8
3	7
4	5
5	3
6	0
7	-1

The marginal utility from each unit of X keeps on declining as the consumer increases his consumption from 1 unit to 7 units. MU is falling but positive from 1^st unit till the 5^th unit. At the 6^th unit the additions to total utility (MU) is zero. After the 6^th unit, there is negative utility or disutility from any more units consumed.

Relation Between Total Utility (TU) and Marginal Utility (MU)

Units of Ice Cream	Marginal Utility (Utils)	Total Utility (Utils)
1	20	20
2	17	37
3	10	47
4	6	53
5	0	53
6	-5	48

MU falls but > O TU falls.
TU increases at decreasing rate.
Point of Satiety MU =0.

When MU decreases but is positive, TU increases at decreasing rate.

(From 0 till the 4^th unit).

When MU becomes zero, TU is maximum.(at the 5^th unit) This is called the Point of Satiety.
When MU decreases and is negative, TU falls. (after the 5^th unit).

What do you understand by consumer equilibrium? Explain consumer equilibrium in case of single commodity.

Consumer equilibrium is a situation in which the consumer gets more satisfaction by spending his income on various goods, in this situation he does not like any kind of change.

Utility or Cardinal Approach (It is assumed that utility or satisfaction can be measured cardinally and expressed in quantitative terms.)

Assumptions of consumer’s equilibrium:–
1. Consumer is a rational animal.
2. It is assumed that utility or satisfaction can be measured and expressed in quantitative terms i.e. utility.
3. Price of the good and income of the consumer is fixed.

Consumer equilibrium in case of single commodity :-

In the case of single good, the consumer is in equilibrium when the consumer in this state fulfills two conditions-

Single good case : When the consumer consumes only one good X. Condition 1:

The price of a commodity is equal to the marginal utility derived from that commodity in the form of money.

Px = MUx/MUm or MUx = Px.
Px = X Price of the good MUx = Marginal utility of the good.
MUm = Marginal utility of one unit of money.

(Marginal utility of X in terms of money equals price of the good X)

Case 1: If MUx > Px Monetary Marginal Utility is greater than the price of the commodity.
The profit from the last unit consumed is greater than the cost of that unit, so the consumer will consume more of the commodity X.
As he consumes more of X, MUx decreases (due to the law of diminishing marginal utility (DMU).
This continues until MUx = Px and equilibrium is reached.
Case 2: If MUx < Px Monetary Marginal Utility is less than the price of the commodity.
The profit from the last unit consumed is less than the cost of that unit, therefore, the consumer will consume less of good.

• As he consumes less of X, MUx increases (due to the application of diminishing marginal utility (DMU)).
• This continues until MUx = Px and equilibrium is reached.

Condition 2: The difference between total utility and total expenditure is the largest when Marginal Utility Diminishing Rule (DMU) is applied.

Units of X good

Marginal Utility from X (Utils)

MUx

Marginal utility of one unit of money

MUm

Total Utility (Utils)

TUx

Total Expenditure

Total ex.

Difference

100

-20

100

180

240

280

300

280

120

180

240

300

360

420

-60

-140

Given table illustrates how a consumer strikes his equilibrium in terms of maximization of satisfaction. Supposing the price of commodity –X is Re 1 per unit which in terms of utility is taken as equal to 60 utils and considered as constant(assuming Mu_m=60 utils). When the consumer buys 3 units of the commodity-X then the marginal utility gained from it consumption and marginal utility sacrificed in terms of its price are equal to each other the consumer will be in equilibrium in this situation because here.

Utility Gained = Utility Sacrificed

In case of two goods :- Consumer consumes two goods X and Y

Condition 1 : $\frac{MUx}{Px}= \frac{MUy}{Py}$ (Law of Equi-Marginal Utility)
(MU from last rupee spent on item X is equal to MU from last rupee spent on item Y)
Case 1: If $\frac{MUx}{Px}> \frac{MUy}{Py}$

It means that the MU received from the last rupee spent on item X is more than the MU obtained from the last rupee spent on item Y.
Consumer likes good X more than good Y.
He will consume more of Good X and less of Good Y because income and prices are fixed.
Due to the application of diminishing marginal utility (DMU), MUx falls and MUy increases.
This continues until $\frac{MUx}{Px}= \frac{MUy}{Py}$ further equilibrium is established.

Case 2: If $\frac{MUx}{Px}< \frac{MUy}{Py}$
It means MU out of the last rupee spent on article X is less than MU of the last rupee spent on item Y.
• Consumer likes good -Y more than article-X.
• He will consume more of Good-Y and less of Good-X because income and prices are fixed.
• Due to the law of diminishing marginal utility, MUx rises and MUy falls.
• This continues $\frac{MUx}{Px}= \frac{MUy}{Py}$ until further equilibrium is established.

Condition 2: The Marginal Utility Diminishing Rule (DMU) should be applicable. If this is not true $\frac{MUx}{Px}> \frac{MUy}{Py}$ and then the consumer will spend all his income on the consumption of only good – X and not consume good – Y which is unrealistic and breaks the law of two-goods equilibrium.

Cardinal Utility Vs Ordinal Utility

Cardinal utility states that the number obtained from consuming consumer goods and services can be measured with data. Cardinal utility is measured in terms of utils (units on the scale of utility or satisfaction). Cardinal utility is a quantitative method used to measure consumption satisfaction.

Normal utility states that the satisfaction derived from consumption of consumer goods and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system. Common use is a qualitative method used to measure consumption satisfaction.

The cardinal utility states that the satisfaction derived from the consumption of consumer goods and services can be measured by numbers.
Ordinal utility states that the satisfaction derived from the consumption of consumer goods and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system in which ranking is assigned to satisfaction derived from consumption.
Cardinal utility is a quantitative measure, whereas ordinal utility is a qualitative measure.
In cardinal utility, it is assumed that consumers derive satisfaction through consuming one good at a time. However, in sequential utility it is assumed that the consumer can derive satisfaction from a combination of goods and services, which will then be ranked by preference.

What do you understand by indifference curve? Describe its main features?

Indifference Curve Approach or Ordinal Approach
(This is based on the assumption that the consumer can rank their preferences)

Indifference curve, indifference curve or successive measure of indifference curve has been described by J. R. Hicks in his book. The indifference curve shows the different combinations of two goods that give the same satisfaction to the consumers or all the combinations on the indifference curve give the same satisfaction. Hence the consumer becomes indifferent or neutral about the choice of these combinations and gives equal importance to all the combinations.

An indifference curve is understood with the help of the following table and diagram.

Combination	Good X	Good Y	MRS
A	1	12	–
B	2	8	(-) 4/1
C	3	5	(-) 3/1
D	4	3	(-) 2/1
E	5	2	(-) 1/1

Marginal Rate of Substitution (MRS)- (Slope of indifference curve)

MRS is the rate at which the consumer is willing to sacrifice one good in order get an additional unit of the other good without affecting total utility.

MRS = $\frac{\Delta Y}{\Delta X}$

Change in the quantity of the good sacrificed = ΔY

Change in the quantity of the good obtained =ΔX

Table of Indifference Curve Explanation :-

1) Combination of Goods X and Goods Y (A to E ) gives the same level of satisfaction to the consumer. Therefore, he is indifferent among the four combinations.
2) As he moves from combination A to B, he is willing to sacrifice 4 units of Y for an additional unit of X.
3) Furthermore, as he moves from B to C, he is willing to sacrifice less than Y (3 units) for an additional unit of X.
4) Similarly, the rate of sacrifice of Y (MRS) decreases because as he consumes more and more units of X, his marginal utility from X starts decreasing (with the application of diminishing marginal utility (DMU). Because of this), he therefore sacrifices less of Y for an additional unit of X. The rate of sacrifice of Y to get one additional unit of X is called marginal substitution rate which decreases as one moves down along an indifference curve.

Indifference Curve

It is a graphical representation of various combinations of bundles of two goods among which the consumer is indifferent or which give the same level of satisfaction to the consumer.

Indifference Curve

The above indifference curve shows the various combinations of X-goods and Y-goods. A, B, C, D and E The combination buys 1 unit of X-goods and 15 units of Y-goods at A-.
Similarly the combination B represents 2,10  units. Apart from this, other combinations C, D, E are also shown on which the consumer gets the same satisfaction.
Thus by joining various combinations. A, B, C, D, E, a curve is obtained which is called an indifference curve.

If we consume more and more of the good-X we have, our desire to get more of the good-X will decrease and we will also be sacrificing good-Y for good-X.

We can see that as the consumer moves down, the change (decrease) in good – Y decreases while the change in good – x remains the same.

Assumptions of indifference curves

Two Commodities: It is assumed that the consumer has a fixed amount of income, whole of which is to be spent on the two goods X and Y, given constant prices of both the goods.
Non-Satiety: It is assumed that the consumer has not reached the point of saturation. Consumer always prefers more of both commodities and higher consumption means higher level of utility.
Ordinal Utility: Consumer can rank his preferences on the basis of the satisfaction from each bundle of goods.
Diminishing MRS: Indifference curve analysis assumes diminishing marginal rate of substitution. Due to this assumption, an indifference curve is strictly convex to the origin.
Rational Consumer: The consumer is assumed to behave in a rational manner, i.e. he aims to maximise his satisfaction.

Properties of indifference curves

1. Downward sloping left to right

In order to obtain more of one good (X), some quantity of the other good (Y) has to be sacrificed to remain at the same level of satisfaction or utility.

The slope of indifference curve is from top to bottom right i.e. negative. This feature, is based on the assumption that if a person uses an additional unit of the good, he has to reduce the quantity of the other good so that all combinations of goods can provide equal satisfaction.

Representation with the help of diagram:-

With the help of the diagram it is clear that the consumer gets OY1 quantity of Y-goods and OX1 quantity of X-goods at point A. Whereas point B receives more quantity OX2 of the X-good than before. Whereas OY2 less quantity of Y-good is obtained than before, which gives the same satisfaction at B point as at A point. For this reason the indifference curve is of negative slope.

2. Strictly convex to the origin

It is due to decreasing MRS (slope of IC). As a consumer consumes more and more units of one good (X), the satisfaction obtained from each successive unit keeps on declining due to the Law of Diminishing Marginal Utility , hence, he is willing to give up lesser and lesser units of the other good (Y) in order to obtain an additional unit of X.

Representation with the help of diagram:-

As it is clear from the diagram that if we increase the consumption of X-goods from 1 units to 2 units, then we have to reduce the quantity of Y-goods equal to PQ units. Similarly, if we again increase the quantity of X-good from 2 to 3, then we have to reduce the quantity of Y-good by QR units. But the quantity of good Y is less than the quantity previously discarded for good X, which is why the indifference curve is progressive towards the origin.

3. Higher indifference curve represents higher level of utility It is due to monotonic preferences of the consumer.

Monotonic preference means that between any two bundles of two goods, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.

Higher indifference curves represent bundles with more quantities of goods and higher consumption means higher level of utility or satisfaction.

Indifference Map :-
The indifference map refers to the family of indifference curves that represent consumer preferences over all bundles of two goods at different levels of satisfaction. In the given diagram, the satisfaction obtained from IC3 is highest, followed by IC2 and then IC1. (ie IC 3 > IC2 > IC1)

4. Two indifference curves Never touch or intersect each other : each indifference curve represents different levels of satisfaction, so they do not intersect or touch. In fig.

on IC1
satisfaction at A= satisfaction at C

on IC2

satisfaction at A= satisfaction at B
But
B≠C
Because equal satisfaction is obtained on the same curve.
satisfaction at A= satisfaction at B on IC1 because equal satisfaction is obtained at each point. On comparing satisfaction at B and C, it is clear from the above equation that B and C cannot be same. Hence, two indifference curves never intersect each other.

(5) indifference curve touches neither X-axis nor Y-axis:- it is often assumed that a consumer buys a combination of two goods. Hence, an indifference curve touches neither X-axis nor Y-axis.

Budget Line: It is a graphical representation of all possible combinations of two goods X and Y that the consumer can buy given income and prices, which costs the consumer exactly his income.

A budget line is which represents all bundles which cost exactly equal to the entire income of the consumer. It is negatively sloping on the budget line, any point represents a combination of the two goods that exhausts the entire inc

P_x.X + P_y.Y = M Where P_x and P_y are prices of goods X and Y respectively and M is the income of the consumer.

Slope of Budget Line (Market Rate of Exchange): It is the rate at which the consumer has to sacrifice units of good Y to buy an additional unit of good X.

MRE = (ΔY/ ΔX)

It is the ratio of prices of the two goods (X and Y) to be exchanged in the market (-) $\frac{Px}{Py}$

$\frac{Px}{Py}$ is constant since prices are constant so the budget line is a straight line.

Determinants of Budget Line : P_x, P_y and M (prices of commodities and income of the consumer)

Budget Set :– It refers to a set of attainable combination of two goods, given market price of the goods and income of the consumer.

It is a set of different combinations of two goods X and Y that the consumer can afford to buy, given income and prices of the goods.

Px.X + Py.Y ≤ M also referred to as Budget Constraint

Properties of Budget Line

Downward sloping : To buy more of one good, some of the other good has to be sacrificed since income is constant.
Straight Line: The slope of budget line is $\frac{Px}{Py}$
which is constant as prices are constant so the budget line is a straight line. Therefore, the market rate of exchange (i.e. $\frac{Px}{Py}$ ) between the two goods remains constant

Shifts in Budget line: The budget line shifts parallel outwards or inwards if income level changes. (No change in slope); slope changes due to change in $\frac{Px}{Py}$ . Budget Line shifts due to changes in P_x, P_y, M or all three.

There is a parallel shift rightwards of the Budget Line in case of increase in income keeping prices constant. Fig (a)
There is a parallel shift leftwards in case of a decrease in income of the consumer keeping prices. Fig (b)

Fig 2:-

The Budget Line rotates rightwards in case of a decrease in price of good X keeping price of good Y and income constant. Fig (a)
The Budget Line rotates leftwards in case of an increase in price of good X keeping price of good Y and income constant. Fig (b)

The Budget Line rotates rightwards in case of a decrease in price of good X keeping price of good Y and income constant. Fig (a)
The Budget Line rotates leftwards in case of an increase in price of good X keeping price of good Y and income constant. Fig (b)

Consumer’s equilibrium – Ordinal / Indifference Curve Approach (Hicksian approach)

Condition 1: MRS = $\frac{Px}{Py}$

Slope of IC = Slope of Budget Line

(The rate at which the consumer is willing to sacrifice units of Y for obtaining an additional unit of X equals the market requirement i.e ratio of prices of X and Y)

Case1: If MRS > $\frac{Px}{Py}$

It means that the consumer is willing to sacrifice more units of good Y for obtaining an additional unit of good X than what the market requires (price ratio).

He values good X more than the market and consumes more of it.
As he consumes more of good X and less of good Y, MRS declines.
This continues till MRS = $\frac{Px}{Py}$ and equilibrium is restored.

Case 2: If MRS < $\frac{Px}{Py}$

It means that the consumer is willing to sacrifice less units of good Y for obtaining an additional unit of good X than what the market requires (price ratio).

He values good X less than the market and consumes less of it.
As he consumes less of good X and more of good Y, MRS rises.
This continues till MRS = $\frac{Px}{Py}$ and equilibrium is restored.

Condition 2: Indifference curves are strictly convex to the origin (MRS declines along the IC) to avoid flat spots and have a unique equilibrium.

IC₁, IC₂ and IC₃ are the three indifference curves and AB is the budget line.

Point C & D lie on a lower indifference curve (IC₁) indicating a lower level of satisfaction.
higher indifference curve (IC₃) is desirable due to higher utility but is unattainable.

The budget line is tangent to indifference curve IC₂ at point ‘E’ where MRS = $\frac{Px}{Py}$

(Slope of IC = Slope of Budget Line).

‘E’ is the point of consumer’s equilibrium, where the consumer purchases OQ_x quantity of ‘X’ and OQ_y quantity of ‘Y’.

Therefore, Point E, point of tangency between the budget line and IC₂is the consumer’s equilibrium (MRS = $\frac{Px}{Py}$ ) where the consumer maximizes his satisfaction.

Unidirectional Preference: It means that out of any two bundles, a consumer prefers that bundle which has more quantity of at least one of these goods and less quantity of the other good as compared to the other bundle. Don’t be If a consumer has unidirectional preferences, he will give priority to the bundle (10, 8) over (8, 6), because the units of both the goods in this bundle are more than the units of both the goods in the other bundle.

Recap

Utility refers to the satisfaction, actual or expected, derived from consumption of a good.
Total utility refers to the total satisfaction obtained from the consumption of all possible units of a commodity.
Marginal utility is the additions to total utility when one more unit of the commodity is consumed.
Law of Diminishing Marginal Utility states that as the consumer consumes more and more units of a commodity the additions to total utility (i.e marginal utility) ) derived from each successive unit consumed keeps on decreasing.
Consumer’s equilibrium refers to a situation when a consumer spends his income on the purchase of a good (or combination of goods) in such a way that gives him maximum satisfaction and he feels no urge to change.
Indifference curve is a graphical representation of various combinations of bundles of two goods among which the consumer is indifferent or which give the same level of satisfaction to the consumer.
Marginal Rate of Substitution is the rate at which the consumer is willing to sacrifice one good in order get an additional unit of the other good without affecting total utility.
Properties of indifference curves ➢ Downward sloping left to right
- Strictly convex to the origin
- Higher indifference curve represents higher level of utility
Budget Line is a graphical representation of all possible combinations of two goods X and Y that the consumer can buy given income and prices, which costs the consumer exactly his income. Px.X + Py.Y = M
The consumer’s equilibrium is located at the point of tangency between the budget line and an indifference curve where MRS = Px/Py

Consumer Behaviour And Consumer Equilibrium