The document discusses various concepts related to consumer behavior theory including: 1. The law of diminishing marginal utility and how it relates to deriving a demand curve. 2. The concept of equi-marginal utility which states that a rational consumer will allocate their budget in a way that equalizes the marginal utility per unit of expenditure across different goods. 3. Indifference curves which represent combinations of goods that provide equal utility to a consumer. Key properties of indifference curves are discussed. 4. The budget constraint line which represents the maximum combination of goods a consumer can purchase given prices and their income level. Consumer equilibrium occurs at the point of tangency between the highest indifference curve and the budget line

1. THEORY OF CONSUMER BEHAVIOUR

2. CONCEPT 1 - Law of diminishing Marginal Utility
(Concept and numerical)
Diamond Water Paradox
Deriving demand curve from Marginal utilituy curve
CASE : A Small peek into Big B’s Car Collection
CONCEPT 2 – Equi Marginal Utility-Concept and problem
CONCEPT 3-Consumer Surplus
CASE : Tata Nano- People’s Car , Uber
CONCEPT 4- Indifference curve – Properties (4)
Assumptions
slope
CONCEPT 5– Budget line ( Concept and Slope)
CONCEPT 6 Consumer Equilibrium ( Budget line is tangent to
the highest possible Indifference curve)

3. DIAMOND WATER PARADOX
Understanding why the paradox exists can be helped by understanding the
economic terms known as marginal utility and scarcity. Scarcity can be simply
defined as how readily available a good, skill, or service is. Is there a lot of it
compared to what people are demanding?
Marginal utility is the additional satisfaction or gain someone gets from using
or purchasing an additional unit of a particular good or service. People are
willing to pay a higher price for goods with greater marginal utility.
water and diamonds. There is plenty of water in most parts of the world (not
scarce), which means that, as consumers, we usually have a low marginal
utility for water. In a typical situation, we aren't willing to pay a lot of money for
one more drink of water. Diamonds, however, are scarce
Amitabh Bachchan's Car Collection | SpotboyE - Bing video_-Case Study
.

4. EXPERIMENT 1
Measure of total satisfaction (utils)
Number of Pizzas
consumed Consumer 1 Consumer 2
1
2
3
4
5
6

5. CONSUMER BEHAVIOUR AND ANALYSIS
Concept 1
UTILITY : EXTENT OF OF SATISFACTION OBTAINED FROM THE
CONSUMPTION OF GOODS AND SERVICES PREFERRED
BY CONSUMERS
APPROACHES
CARDINALIST APPROACH : Utility can be measured in subjective terms
or it is quantifiable.
ORDINAL APPROACH : Utility cannot be measured but only ranked in
Order of preference.

6. CARDINAL APPROACH – Law of Diminishing marginal
Utility
TOTAL UTILITY : Total satisfaction enjoyed from the
consumption of the good.
MARGINAL UTILITY : Rate of change in total utility per unit
charge in the quantity of the good
consumed.
Change in total Utility
1 unit change in Quantity Consumed
LAW OF DIMINISHING MARGINAL UTILITY
Marginal Utility of any good tends to decline as we consume more
Units of it over a definite period of time. The diagrammatic
representation is as follows.

7. Number
of
Cokes
TU MU
0
1
2
3
4
5
6
7
8
0
10
18
24
28
30
30
29
27
-
10
8
6
4
2
0
-1
-2
Diminishing Marginal Utility
Tun -Tun-1=MUn
-5
0
5
10
15
20
25
30
35
0 2 4 6 8 10
Utility and Marginal Utility
TU
MU
Number of cokes

8. ASSUMPTIONS
It is assumed that the unit of the consumer good is a standard
one, i.e. the rational quantity of the commodity is consumed. Such
as, a cup of tea, a pair of shoes, bottle of cold drink, glass of water,
etc.
It is assumed that the utility is measurable, and the satisfaction
of the consumers can be expressed in the quantitative terms.
The consumer’s tastes and preferences remain same during the
period of the consumption.
There must be continuity in the consumption. If a break is
necessary, then the time interval between the consumption of two
units should be appropriately short.
It is assumed that the quality of the commodity remains
uniform during the period of consumption.

9. It is assumed that the income of the consumer and the price of goods
and services remains unchanged during the period of consumption.
The marginal utility of money remains constant for the consumer.
The mind of the consumer should remain rational during the
consumption period. For example, if a person drinks any alcoholic drink,
then he will derive more pleasure with each additional glass of drink, this
is because of a change in his mental status due to intoxication.

10. Given the following data plot the TU curve and MU curve
And explain LDMU With its assumptions
Units TU MU
1 30 30
2 50 20
3 60 10
4 65 5
5 60 -5
6 45 -15
PLOT THE FOLLOWING IN NOTE BOOK

11. Derivation of the demand curve from MU curve
Eqiulibrium condition of the consumer is given as
MU =MUmP1
If P1 falls it automatically implies that MU should fall for equilibrium
to be restored
Furthermore it is evident that MU can decrease only if Quantity
demanded increases
Therefore when price of good falls consumer will buy more of the good
To equate marginal utility to lower price. Hence the inverse relationship
Between price & quantity
mu1
mu2
mu3
q1 q2 q3
p1
p2
p3
q1 q2 q3

12. ILLUSTRATION
1) ASSUME THAT UTILITY CAN BE MEASURED IN RS. FROM THE UTILITY SCHEDULE
GIVEN BELOW.FINO HOW MANY COKES THE CONSUMER WOULD CONSUME AT THE
PRICE OF RS. 9 PER COKE.
EQUILIBRIUM IS REACHED AT A LEVEL WHERE MU = P i.e. WHEN 3 COKES ARE CONSUMED
COKES TOTAL UTILITY MU
1
2
3
4
5
30
45
54
59
59
0
15
9
5
0

13. Utility
Economists use the term utility to describe the satisfaction or
enjoyment derived from the consumption of a good or service. If
we assume that consumers act rationally, this means they will
choose between different goods and services so as to maximize
total satisfaction or total utility.
Consumers will take into consideration
•How much satisfaction they get from buying and then consuming
•an extra unit of a good or service
•The price that they have to pay to make this purchase
•The satisfaction derived from consuming alternative products
•The prices of alternatives goods and services

14. RATIONALITY ASSUMPTION- CONSUMER MAXIMISES HIS
SATISFACTION WHEN HE EQUATES THE MARGINAL UTILITY
PRICE RATIO(Mun/Pn) FOR ALL THE PRODUCTS
EQUI MARGINAL UTILITY

15. EQUILIBRIUM CONDITION – LAW OF EQUI – MARGINAL
UTILITY
(concept 2)
Suppose a consumer spends his income in purchasing 3 goods
X1, X2, X3 with respective prices of P1, P2 &P3 the consumer will
allocate his income between the three goods in such a way that the
Marginal utility per Rs he spends on every good is equalised and his total
utility is maximised. Eg if here are n number of goods
MU/P1=MU/P2=MU/P3………..=MUn/Pn=Mum
If MU1/P1>MU2/P2 then the rational consumer will consume
more of X1 till MUI/P1=MU2/P2

16. Assumptions
The principle of equi-marginal utility is based on the following assumptions:
(a) The wants of a consumer remain unchanged.
(b) He has a fixed income.Marginal utility of money is constant
(c) The prices of all goods are given and known to a consumer.
(d) He is one of the many buyers in the sense that he is powerless to alter the
market price.
(e) He can spend his income in small amounts.
(f) He acts rationally in the sense that he want maximum satisfaction
(g) Utility is measured cardinally. This means that utility, or use of a good, can
be expressed in terms of units or utils. This utility is not only comparable but
also quantifiable.

17. CRITICISMS OF UTILITY THEORY
Some economists claim that utility cannot be measured objectively.
There are also doubts about the assumption of rational behaviour
among consumers particularly in a
world where consumers cannot expect to have all the
information available on the products available in a market.

18. ILLUSTRATION
2) A CONSUMER HAS AN INCOME OF RS. 19 FOR A WEEK. HE WOULD
LIKE TO SPEND ALL THE RS. 19 ON THREE GOODS X, Y & Z. PRICES
OF X, Y & Z ARE RS. 5, RS. 3 AND RS. 1. THE MARGINAL UTILITY
SCHEDULE IS SHOWN BELOW.

19. EQUILIBRIUM IS REACHED WHEN MU = 5 WHERE THE CONSUMER 2 UNITS OF X,
P
2 UNITS OF Y AND 3 UNITS OF 2.
ALLOCATION OF EXPENDITURE
UNITS MARGINAL UTLITIES MuX MuY MuZ
Px Py Pz
X Y Z X Y Z
1 30 18 8 6 6 8
2 25 15 7 5 5 7
3 20 9 5 4 3 5
4 15 6 4 3 2 4
5 5 4 3 1 1.33 3
QTY X PRICE = EXPENDITURE
GOOD - X 2 x 5 = 10 4 x 5 = 20
GOOD - Y 2 x 3 = 6 3 x 3 = 9
GOOD - Z 3 x 1 = 3 5 x 1= 5
TOTAL 19 34

20. CONSUMER SURPLUS- CONCEPT 3
Consumer’s surplus is defined as the difference between what a
Consumer is willing to pay(OA) and what we actually pays.(OP)
ILLUSTRATION
N
P
A
O Q
p1
p2
q1 q2
r1 r2
p
Consumer’s
surplus Area of triangle APN
Consumer surplus

21. Equilibrium price = $5
Equilibrium demand = 500
0.5x 500 x5 = 1250
Price they
Are wiiling
To pay =10

22. Real World Example of a Consumer Surplus
Consumer surplus is the benefit or good feeling of getting a good deal. For
example, let's say that you bought an airline ticket for a flight to Disney
during school vacation week for $100, but you were expecting and willing to
pay $300 for one ticket. The $200 represents your consumer surplus.

23. Price they are wiling
To pay =10 and tax of 2,5 is imposed so
price rises to $7.5 the area of consumer
surplus decreases

25. https://www.youtube.com/watch?v=nqWeiVyzlaQ
https://www.youtube.com/watch?v=tpSoejz8CbI

26. Concept 4-
RATIONALE BEHIND THE THEORY
KEY QUESTION
CAN ONE ACTUALLY MEASURE UTILITY CARDINALLY ?
DOES MONEY POSSESS CONSTANT MARGINAL UTILITY ?
IS IT PRAGMATIC TO ADOPT AN OBJECTIVE VALUATION
OF A SUBJECTIVE CONCEPT ?
BIRTH OF THE INDIFFERENCE CURVE ANALYSIS – IT IS
MORE REALISTIC TO RANK YOUR PREFERENCE
THAN MEASURE YOUR SATISFACTION

27. DEFINITION – INDIFFERENCE CURVE IS THE LOCUS OF
POINTS OF PARTICULAR COMBINATION OR BUNDLES OF GOODS WHICH YIELD
THE SAME SATISFACTION TO THE CONSUMAR SO THAT HE IS INDIFFERENT AS
TO THE PARTICULAR COMBINATION HE CONSUMES. (CONCEPT 1)
ASSUMPTIONS
 RATIONALITY
 ORDINALITY
 DIMINISHING MRS
 CONSISTENCY & TRANSITIVITY OF CHOICE,
A > B, THEN B />A, IF A>B, and B>C
Then A>C

28. 9/8/2022 28
INDIFFERENCE SCHEDULE
QX qx1 QY qy1
2 3 10 11
3 4 8 9
4 5 7 8
5 6 6.5 7.5
Draw two IC curves with the given data

29. PROPERTIES OF INDIFFERENCE CURVES
1. Indifference curves have a negative slope
2.Indifference curves of imperfect substitutes are convex to the origin
3.Indifference curves do not intersect
4.Higher Indifference curves give higher level of satisfaction

30. IC1
MRS<1
2
6
8
10
MRSxy
2
1
0.5
dy
dx
F
SLOPE OF THE IC CURVE AT F =MRSxy at F(Mux/Muy)
WHERE CONSUMER IS WILLING TO SACRIFICE 2UNITS
OF Y FOT 1 UNIT OF X
DOWNWARD SLOPING IC CURVE (PROPERTY 1)
IC curve is downward sloping as for consuming
More of X he has to sacrifice Y
G
H
I
Qx
Qy
2 3 4 5 6
7
3
5
4

31. Movement from F to G
MUY ΔY = - (MUX) (Δ X) ( MRS = ΔY/ Δ X )
= -MUX/MUY(Slope of IC)
SLOPE OF IC- MARGINAL RATE OF SUB STITUTION (DECLINIING)

32. 9/8/2022 32
IC curves cannot be
Concave to the origin . They are
Convex to the origin
IC curve cannot have
Increasing MRS but
Always declining MRS
PROPERTY 2 (

33. 9/8/2022 33
PERFECT SUBSTITUTES COMPLEMENTS
GOODX
GOODY
GOOD X
GOOD Y
MRS is constant
Both goods
Consumed in fixed
proportion
It cannot be a right angle or a straight line
Hamburger
Hamburger
Buns

34. IC1
IC2
A
B
C
PROPERTY 3
No two Indifference curves
Can intersect each other

35. IC4
IC3
IC2
IC1
UNITS OF GOOD X
UNITS OF GOOD Y
E
Consumer is rational so he would
always maximise his satisfaction and
Would prefer the highest IC curve
PROPERTY 4

36. 5 0 15 B 20
30
20
15
0
Px=2
Py=1
Budget = 30
UNITS OF GOOD X
UNITS OFY
Y/pX
Y/Py
Xpx+ YPY = IINCOME CONSTRAINT)
A
Budget line AB
CONCEPT 4-BUDGET LINE
Equation of budget line
Y/py/Y/Px (Slope) = -OA/OB
-Px/pY

37. IC4
IC3
IC2
IC1
UNITS OF GOOD X
UNITS OF G GOOD Y
E
CONSUMER EQUILIBRIUM
Slope of IC curve =Slope of budget
Line
-Mux/Muy = -Px/Py
A
B
CONCEPT 6

38. A DISCUSSION ON THE CONCEPT SLOPE
 SLOPE OF THE IC CURVE – MARGINAL RATE OF
SUBSTITUTION BETWEEN X & Y
MRSxy – AMOUNT OF Y A CONSUMER IS WILLING TO
GIVE UP FOR AN ADDITIONAL UNIT OF X
= - MUx / MUy
MATHEMATICALLY IT IS THE SLOPE OF A TANGENT AT
ANY POINT ON THE IC = - dy / dx (negative)
 SLOPE OF THE BUDGET LINE – PRICE RATIO OF THE
TWO COMMODITIES X & Y = - Px / Py
At equilibrium /tangency Slope of IC curve( Mux/Muy )
= Slope of budget line (Px /Py)

39. QUESTIONS

40. 9/8/2022 40
What do you mean by consumer
equilibrium?
What is implied at the point of tangency
Of the IC curve and budget line?
At point of tangency
Slope of IC curve = Slope of budget line
Mux/Muy = Px/Py

41. 9/8/2022 41
What do you mean by Income effect?
Given a budget of Rs 100 and Px = 20
and Py =25 Show the budget line.
If Income to 150 increases prices remaining
unchanged what will Happen to the budget line?

42. SHIFT IN BUDGET line (increase in income from 100 to 150
)-CONCEPT 8 EXTN
1 2 3 4 5 6 7 7.5
4
3
2
1
0
Answer
6
5

43. 5 10 15 20 25 30
30
20
15
0
Px=2
Py=1
Budget = 30
Effect of a fall of price of X
to 1
UNITS OF GOOD X
UNITS OFY
IC1
IC2
E1
E2
ROTATION OF BUDGET LINE
A
B1 B2
C0NCEPT 9

44. 5 10 15 B 20 25 30
Px=2
Py=1
Budget = 30
Effect of a fall of price of Y
to 0.5
UNITS OF GOOD X
IC1
IC2
E1
E2
60
50
40
30
20
10
GOOD Y
A
A1