The document discusses consumer behavior, focusing on the concept of consumer equilibrium in economics, which refers to a state where consumers maximize their satisfaction given their limited income. It highlights the Law of Diminishing Marginal Utility, explaining how utility decreases with successive consumption of a good and explores methods to achieve equilibrium through utility measures. Additionally, it addresses the interaction of price, marginal utility, and income allocation between two goods in determining consumer choices.

1. Consumer Behavior

2. Who buy goods and services
to satisfy wants
Who Is Consumer
To get maximum
satisfaction from spending
his income on various goods
Main Aim

3. Has Limited Income Over Unlimited
Wants
And Wants Maximum
Satisfaction
Problem Of Consumer

4. Consumer Equilibrium
In Economics Equilibrium Means
“ A Position Of No Change”
Benefit Cost

5. What Is Consumer Equilibrium?
Situation under
which he spends his
given income on
purchase of a
commodity in such a
way that gives him
maximum utility and
he feels no wish to
change
his consumption
level Paisa Vasool

6. Consumer Behavior (Two Approach)
Law Of Diminishing Marginal
Utility Approach(Cardinal)
Indifference Curve
Approach(Ordinal)
J.R HICKS
ALFRED MARSHAL

7. Cardinal Utility Approach
(Diminishing Marginal Utility Approach)
As consumer
consumes more
and more units
of a commodity
his intensity of
the want goes on
falling and a
point is reached
when he want no
more units of it
1
2
3 6
5
4

8. Law Of Diminishing Marginal Utility
•When a consumer consumes more and more units of commodity
Marginal Utility with each successive units diminishes
•Fundamental psychological law which operates universally

9. General Assumption of law of DMU
The aim of the consumer should be to get the maximum satisfaction
The utility can be measured in cardinal numbers such as 1, 3, 10, 15, etc.
There is no change in the unit of quantity & quality of commodity consumed by
the customer
Marginal utility obtained from the consumption of a good diminishes continuously
as its consumption is increased.
There should be continuous consumption with any interruption
Rationality
Utility is cardinally measurable
Standardized Commodity
Continuous consumption
Diminishing marginal utility

10. Consumer Consume The
Commodity Because It Give
Them Happiness Or
Satisfaction
Why Consumer Consume Commodity.?

11. Utility refers to the want satisfying power of a
commodity.
Utility Concept
An imaginary unit used to measure utility.
Utils
Cloth has a utility for us
because we can wear it.
Pen has a utility who can
write with it.

12. It changes from time to time person to person and place to place
Characteristics Of Utility
. It cannot be measure but for the sake of the convenience we assume it can
be measures in terms of utils.
Utility Is Relative Term
Utility Is Subjective Term
. Higher utility does not means greater usefulness. Cigarettes may give
utility to a smoker but are not useful otherwise
Utility is not essentially useful

13. Concept Of Utility
Initial Utility Marginal Utility Total Utility

14. Initial Utility
Utility obtain from the consumption of first unit of
the commodity

15. Marginal Utility
The net addition to the total utility when
one more unit of commodity is consumed
MU
∆ TU
∆ Q
MU = Marginal Utility
∆TU = Change in Total Utility
∆ Q = Change in Quantity
TUN = Total utility from N units
=
Where
MU = TUN TUN-1

16. Total Utility
It is the sum of the utilities of all the units
consumed
TU = ∑MU
TU = Total Utility
∑MU = Sum Of Marginal Utility
Where

17. Units Marginal
Utility
Total Utility
1 10 10
2 8 18
3 6 24
4 4 28
5 2 30
6 0 30
7 -2 28
8 -4 24
Marginal utility is
positive up to 5
units
At 6th
unit MU is
0 and TU is
maximum
After 6TH
Unit MU
becomes negative
and TU decreases
Relationship Between Total Utility And Marginal Utility

18. 1 2 3 4 5 6 7 8
-10
-5
0
5
10
15
20
25
30
35
When TU Is Falling,
MU Curve Becomes
Negative(after 6th
Unit)
When TU Is
Maximum, Called
Saturation Point MU
Is Zero (At 6th
Unit)
When TU Is Rising
MU Curve Falls But)
Positive( up to 5th
Unit)
Saturation
Point
TU
MU
MU/TU
Quantity

19. What happens to marginal utility when total utility is maximum.?
What happens to total utility when marginal utility is positive.?
What happens to total utility when marginal utility is negative.?
Marginal utility is zero
Solution
Problem
Total utility start falling
Solution
Problem
Total utility is rising
Solution
Problem

20. AMOUNT TU MU
1 50 50
2 90
3 30
4 140
5 155
AMOUNT TU MU
1 50 50
2 90 40
3 120 30
4 140 20
5 155 15
Solution
Problem

21. Three realistic condition
For consumer equilibrium
1.When there is single commodity and buyer has not to
pay the PRICE
2.When there is single commodity and buyer has to pay
the PRICE
3.When there is two commodity and buyer has to pay
their PRICE

22. PINKU
PINKU likes
Burger very
Much.
CASE 1 When buyer does not have
to pay any PRICE

23. Now how Much burger
PINKU should Eat so
that
He can get maximum
Satisfaction
Assume
Burger Is Free
Of Cost

24. 1 2 3 4 5 6 7
4
8
12
MU
MU
Quantity
Consumer
Equilibrium
1
2
3
4
5
6
7
10
8
6
4
2
0
-2
He will continue his consumption till
MU = ZERO
Quantity Marginal
Utility

25. Now lets us see
What will happen if PINKU
has to pay some price
Consumer Equilibrium (One Commodity Case)
CASE 2

26. Naturally PINKU will
Buy the good only
If the benefit in the form
Of utility is equal to the
price

27. Conditions For Consumer Equilibrium
MU Of The Product =
1
2 MU Of Commodity keeps on falling with each
successive unit ( law of diminishing marginal utility)
Price Of The Product
Benefit Cost
=

28. Suppositions
Price of the burger is RS 2

29. Units Price MU Of Burger
1 2 10
2 2 8
3 2 6
4 2 4
5 2 2
6 2 0
Case 1st
When MUm > Px
(He will consume more because he is getting more
than what he gives)
Benefit > Cost
Price of the burger is RS 2

30. Units Price MU Of Burger
1 2 10
2 2 8
3 2 6
4 2 4
5 2 2
6 2 0
Case 2nd When Mux < Px
(He will consume Less because he is getting less
than what he gives)
Benefit > Cost
Price of the burger is RS 1

31. Units Price MU Of Product
1 2 10 MU x > Price
2 2 8 MU x > Price
3 2 6 MU x > Price
4 2 4 MU x > Price
5 2 2 MU x = Price
6 2 0 MU x < Price
Price of the burger is RS 2
Equilibrium
The second condition Implies that the law of
diminishing MU is operating. If, with increase in
consumption of X Marginal utility remains
unchanged or constant, he will keep on consuming
the commodity which is unrealistic and the
consumer will not reach equilibrium

32. What happens when MUX PX
When equilibrium is disturbed
Not equal to is
Case 1st
MUX
PY
>
When
•Satisfaction of the consumer derives from a rupee on good X
greater than the satisfaction derived from spending a rupee on
good Y.
•The consumer will reallocate his income by substituting good x
for good y.
•As the consumption of good X increases the MU derived from it
goes on diminishing and reverse proposition occurs for good y, Till
MUX
PX
=
MUY
PY

33. What happens when
MUX
PX
MUY
PY
When equilibrium is disturbed
Not equal to is
Case 2nd
MUX
PX
MUY
PY
<
When
•Satisfaction of the consumer derives from a rupee on good Y
greater than the satisfaction derived from spending a rupee on
good X.
•The consumer will reallocate his income by substituting good Y
for good X.
•As the consumption of good Y increases the MU derived from it
goes on diminishing and reverse proposition occurs for good X, Till
MUX
PX
=
MUY
PY

34. Units 1 2 3 4 5 6
Total Utility 20 36 50 62 68 60
Marginal
Utility
20 16 14 12 6 0
Given below is the Utility schedule of a consumer of X-commodity. If the price
per Unit is given at Rs. 12 each. Determine Consumer’s equilibrium.
Solution
Problem
Units 1 2 3 4 5 6
Total Utility 20 36 50 62 68 60
Marginal
Utility
20 16 14 12 6 0
Consumer will be at equilibrium at 4th
unit
Price MU Of A Product
=
12 12
=

35. Units of Good 1 2 3 4 5 6
Total Utility 20 36 48 58 66 72
A commodity has Rs. 10 as price per unit. His total utility schedule is
given below. Determine his equilibrium point.
Solution
Problem
Units of Good 1 2 3 4 5 6
Total Utility 20 36 48 58 66 72
Marginal utility - 16 12 10 12 6
price 10 10 10 10 10 10
Consumer will be at equilibrium at 4th
unit
Price MU Of A Product
=
10 10
=

36. Law Of Equi - Marginal Utility
(Two Commodity Case)
Now lets us see
What will happen if PINKU has to
pay the price and there are two
commodities

37. According To This Law Consumer will be in
Equilibrium when utility gained from last Rupee
on each commodity is equal.
Law Of Equi Marginal Utility/two commodity case
Condition For Consumer Equilibrium
MUX
PX
=
MUY
PY
1. Marginal utility of the last rupee of expenditure on
each good is the same.
2. Marginal utility of a good falls as more of it is
consumed.

38. Suppositions
Price of the GOODS X is RS
1
Price of the GOODS Y is
RS
1

39. Consumer will be in equilibrium by consuming
7 Units Of Goods X
5 Units Of Goods Y
Both The Condition Are Getting True
MUX
PX
=
MUY
PY
1. =
6
= =
6
1 1

40. 2nd
Condition:-Implies that the law of diminishing MU is operating.
If MUx remains unchanged, then
With increase in consumption of X, Marginal utility of X will
remain unchanged.
Therefore he will keep on consuming only one good i.e X
which is unrealistic and the consumer will not reach
equilibrium.
MUX
PX
=
MUY
PY

41. What happens when
MUX
PX
MUY
PY
When equilibrium is disturbed
Not equal to is
Case 1st
MUX
PX
MUY
PY
>
When
•Satisfaction of the consumer derives from a rupee on good X
greater than the satisfaction derived from spending a rupee on
good Y.
•The consumer will reallocate his income by substituting good x
for good y.
•As the consumption of good X increases the MU derived from it
goes on diminishing and reverse proposition occurs for good y, Till
MUX
PX
=
MUY
PY

42. What happens when
MUX
PX
MUY
PY
When equilibrium is disturbed
Not equal to is
Case 2nd
MUX
PX
MUY
PY
<
When
•Satisfaction of the consumer derives from a rupee on good Y
greater than the satisfaction derived from spending a rupee on
good X.
•The consumer will reallocate his income by substituting good Y
for good X.
•As the consumption of good Y increases the MU derived from it
goes on diminishing and reverse proposition occurs for good X, Till
MUX
PX
=
MUY
PY

43. Consumer consumes only two goods X and Y. at a
consumption level of these two goods, he finds that the
ratio of marginal utility to price in case of X is higher than
in case of Y. Explain the reaction of the consumer
According To principal of equi-marginal utility a consumer
gets maximum satisfaction only when…
MUX
PX
=
MUY
PY
MUX
PX
>
MUY
PY
But
when
He will buy more of X- good by which MUx will fall till
Problem
MUX
PX
=
MUY
PY
Solution

44. A consumer consumes only two goods X and Y whose prices are
Rs 4 and Rs 5 per unit respectively. If the consumer chooses a
combination of the two goods with marginal utility of X equal
to 5 and that of Y equal to 4, is the consumer in equilibrium?
Give reasons. What will a rational consumer do in this
situation? Use utility analysis.
•Conditions of consumer equilibrium in two commodities are
Marginal utility of the last rupee of expenditure on each
good is the same.
•Marginal utility of a good falls as more of it is consumed.
only when…
MUX
PX
=
MUY
PY
Problem
Solution

45. A consumer consumes only two goods X and Y whose prices are
Rs 4 and Rs 5 per unit respectively. If the consumer chooses a
combination of the two goods with marginal utility of X equal
to 5 and that of Y equal to 4, is the consumer in equilibrium?
Give reasons. What will a rational consumer do in this
situation? Use utility analysis.
According To principal of equi-marginal utility a consumer
gets maximum satisfaction only when…
MUX
PX
=
MUY
PY
5
4
>
4
5
But
when
He will buy more of X- good by which MUx will fall till
Problem
MUX
PX
=
MUY
PY
Solution

46. Test your knowledge
1. Who is consumer
2. What is meant by utility, properties of utility, util.
3. Define marginal utility
4. Define total utility
5. What is the relationship between TU and MU explain with diagram
and table.
6. State the law of diminishing marginal utility
7. A consumer consume only one good. Explain equilibrium with the help
of utility approach
8. A consumer consume only two goods. Explain equilibrium with the help
of utility approach
9. Price of the chocolate is Rs 10. Monu who has already eaten 5
chocolate. His marginal utility from eating 5 chocolate is 50.
Suppose marginal utility on one rupee is 5 utils. Should he eat more
or stop. Explain

47. Indifference Curve Approach
According to this
approach consumer
can rank the
bundle and tell
which bundles is
best
Based on
preferences
Bundle Ranking
(5,5) Ist
(4,5),(5,4) 2nd
(3,4),(4,3) 3rd

48. Three steps involved in the Study of consumer
behavior
Consumer Equilibrium
What amount goods be purchased for maximum satisfaction
Budget Constraints
People have limited incomes
Consumer Preferences
Why people prefer one good to another

49. General Assumption
Consumers Consumes Only Two Commodity
Consumer Can Rank The Bundles In Order Of His
Preferences Over Them
Consumers Income Is Given
Price Of The Two Goods Is Given

50. Combination of the two goods is called a
consumption bundle
Example
Consumption Bundle
The bundle (5,10) consists of 5 units of Good 1
and 10 units of Good 2

51. Between any two bundles
Consumer can either be
Indifferent
Same satisfaction
Monotonic
Different satisfaction

52. Indifferent
Same satisfaction
Monotonic
Different satisfaction
25,1
16,2
10,3
10,10
8,7
6,4
If consumer picks any
bundles he is indifferent
(same
satisfaction)
If consumer rank and select
best bundle his preferences
are monotonic
(different satisfaction)
10,10
8,7
6,4
25,1 16,2 10,3

53. Monotonic Preference
Consumer’s chooses a
bundle which gives
more of both the goods
or at least one good
without reducing the
quantity of the other
good
More Is Always
Better Than Less
Between The Two
Bundles
Which Bundle Is
Better
10,10 9,10
10,9 9,9
10,9 9,8

54. Indifferent scheduled
Table Showing
different
combinations of
two goods that
yield the same
level of
satisfaction
Basket
Y X
A 25 1
B 16 2
C 10 3
D 7 4
E 6 5

55. If a consumer has monotonic preferences can
he be indifferent between the bundle (6,4) and
(5,3)
No he can’t be indifferent because both the
goods in second bundle have fewer goods
Solution
Problem

56. Suppose a consumer’s preferences are monotonic.
What can you say about his preferences ranking
over the bundle (20, 20) (20, 18) (18, 18)
His most preferred bundle would be (20, 20). He
cant be indifferent because given bundles gives
different satisfaction.
Solution
Problem

57. Indifference Curve
Graphical representation showing different
combinations of two goods that yield the same
level of satisfaction

58. BASKET
Y X MRS
A 25 1
B 16 2 9:1
C 10 3 6:1
D 7 4 3:1
E 6 5 1:1
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
0
5
10
15
20
25
30
A
B
C
D
POINTS A, B, C, D AND E
can be connected to form
the indifference curve
represents possible
combinations of good X and
good Y
GOOD X
E
GOOD
Y
IC

59. 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
0
5
10
15
20
25
30
A
B
C
D
POINTS A, B, C, D AND E
gives same level of satisfaction
Good X
E
Good
Y
IC

60. GOOD
Y
GOOD X
O
IC1
IC2
IC3
Y
X
• A set of Indifference
Curves, each
representing a different
level of utility.
• Where Higher
Indifference Curve
gives higher level of
satisfaction or VICE-
VERSA
Indifference Map

61. GOOD
Y
GOOD X
IC1
Y
E
IC2
IC3
0 X
G
H
Most Preferred bundle
(contains more ) of both
goods
Least preferred bundle
(contains less ) of both
goods

62. Amount of good Y that consumer is willing to give
up to get an additional unit of good X .
Marginal Rate Of Substitution
∆Y
∆ X
=
MRS XY
BASKET Y X MRS
A 25 1
B 16 2 9:1
C 10 3 6:1
D 7 4 3:1
E 6 5 1:1

63. 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
0
5
10
15
20
25
30
A
B
C
D
Good X
E
GOOD
Y
IC
Marginal Rate Of Substitution
∆9
∆1
∆3
∆1
∆Y
∆ X
=
MRS XY
Slope Of Indifference Curve =

64. 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
0
5
10
15
20
25
30
A
B
C
D
Good X
E
Good
Y
IC
Diminishing
MRS
MRS = 9
MRS = 3
∆9
∆1
∆3
∆1
MRS Always diminishes.
From the diagram we see when consumer moves from basket
A to basket B, he is willing to give up 9 units of Y for 1 unit
of good X.
But when consumer moves from basket C to basket D he is
willing to give up only 3 units of Y for 1 unit of X. Thus MRS
always falls

65. Properties Of Indifference Curve
Downward Or Negative Sloped From Left To Right
Indifference Curves do not Touch the Horizontal or
Vertical Axis
Two indifference curve never intersect each other
Convex To The Origin
Higher IC, Higher Is The Level Of Satisfaction And
Vice, Versa.
D
I
T
C
H

66. GOOD
Y
GOOD X
IC1
Downward Sloping From
Left To Right
Downward sloping
curve express that if
the quantity of one
good is subtracted
then the quantity of
the other good is to
be increased

67. GOOD
Y
GOOD X
IC1
Indifference Curves do not Touch the Horizontal or
Vertical Axis
One of the assumptions of indifference
curves is that the consumer purchases
combinations of two commodities.
Consumption of one commodity can never
be zero

68. GOOD
Y
GOOD X
IC1
Two indifference curve never
intersect each other
IC2
Because two indifference
curves never gives same
levels of satisfaction
B

69. Convex To The Origin
It is convex to the origin due to
diminishing marginal rate of
substitution(MRS)
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
0
5
10
15
20
25
30
A
B
C
D
GOOD X
E
Good
Y
IC
Diminishing
MRS
MRS = 9
MRS = 3
∆9
∆1
∆3
∆1

70. GOOD
Y
GOOD X
IC1
IC2
Higher IC, Higher Is The Level Of
Satisfaction And Vice, Versa.
On higher indifference curves
consumer get more goods without
reducing the other. (Monotonic
preferences). IC2 has more of X
goods than IC1 without reducing the
consumption of Y - goods

71. Budget
Given fixed income and the prices of the two goods, the
consumer can afford to buy only those bundles which
cost less than or equal to income.
WHER
E
Px = Price of X
Qx = Quantity of X
Py = Price of Y
Qy = Quantity of Y
I = INCOME of the consumer
PX QX PY
QY <= B
x x
+
=

72. Consumer budget
Assume consumer has 40 Rs
Price of the GOODS X is RS
10
Price of the GOODS Y is
RS
10

73. 0 1 2 3 4 5 6
0
1
2
3
4
5
6
BASKET Good X
(Price Rs 10)
Good Y
(Price Rs 10)
INCOME
GOOD
Y
GOOD X
A
B
D
C
E
A 0 4 40
B 1 3 40
C 2 2 40
D 3 1 40
E 4 0 40
The Budget Line
Graphical presentation
showing all combinations
of two commodities
that consumer can buy
with the given income
and prices.

74. 0 1 2 3 4 5 6
0
1
2
3
4
5
6
GOOD
Y
GOOD X
A
B
D
C
E
Affordable
Bundle
Unaffordable
bundle
Exact
bundle

75. Budget Line Equation
Slope Of Budget Line
•The slope indicates the rate at which the two
goods can be substituted without changing the total
income
Slope Of Budget Line
PX QX PY QY = B
x x
+
=
=
Px
Py
Or ∆Y
∆X

76. Budget Set Budget Line
DIFFERENCE BETWEEN
Collection of those bundles
that the consumer can afford
to purchase with his money-
income at the given prices of
the goods
Collection of those bundles
that can be purchase by
spending all his money income
Budget set:-
PX X QX + PY X
QY <= B
Show all bundles less than
or equal to budget
Show all the bundles which
are exactly equal to budget
Budget Line:-
PX X QX + PY X
QY = B

77. Illustration
Consumer has Rs 10 and both goods A and B are price at Rs 2
1. Give the affordable bundles
2. Give the exact bundles
3. Unaffordable bundles
Affordable Bundles Exact Bundles Unaffordable bundles
0,0 1,0 1,1
0,1 2,0 2,1
0,2 3,0 3,1
0,3 4,0 4,1
0,4 5,0 2,2
0,5
0,1
1,2
1,3
1,4
0,5 5,0
2,3 3,2
2,3 3,2
4,1 1,4
4,2 3,3

78. Budget Line May Change Depending On
Change in the
price of the
commodity
Change in the
income of the
consumer

79. Suppositions
Price Of
Goods X
Rs 1
Price Of
Goods Y
Rs 1
Consumer’s Income Rs
40
40 60 80
20
20
40
60
80
0
GOOD
Y
GOOD X

80. Effect Of Changes In
Income(rises)
What happens
When income rises from
Rs 40 to 80
Budget line will shift
outward (can buy more of
both of the goods)
40 60 80
20
20
40
60
80
0
GOOD
Y
GOOD X

81. Effects Of Changes In
Income(falls)
What Happens
When Income Falls From
Rs 40 TO 20
Budget line will shift
inward (can buy less
of both the goods)
40 60 80
20
20
40
60
80
0
GOOD
Y
GOOD X

82. Effects Of Changes In
Prices(falls)
40 60 80
20
20
40
60
80
0
What happens
When prices of both the
Goods falls from
Rs 1 to 50 paisa
GOOD
Y
GOOD X
Budget line will shift
outward (can buy more
of both of the goods)

83. Effects Of Changes In
Prices(falls)
40 60 80
20
20
40
60
80
0
What Happens
When Prices Of Both The
Goods Rises From
Rs 1 To Rs 2
GOOD
Y
GOOD X
Budget line will shift
inward (can buy less
of both the goods)

84. 40 60 80
20
20
40
60
80
0
GOOD
Y
GOOD X
If The Price Of One Good Increases
And Other Remains Constant
The Budget Line Rotates
Inward
Could Buy Less Of
Goods X
What Happens
When Price Of Good X
Rises From
Rs 1 To Rs 2

85. 40 60 80
20
20
40
60
80
0
GOOD
Y
Good X
Budget Line Shifts Outward.
If The Price Of One Good Decreases
And Other Remains Constant
Could Buy More Of
Goods X
What Happens
When Price Of Good X
Fall
50 paisa from Rs 1

86. If income increases/decrease and the
price of both the goods remains constant.
If prices of both the goods increases or
decreases in the same proportion.
Slope of budget line does not change if

87. Consumer Equilibrium By Indifference Curve Approach
Consumer equilibrium is attained when the
consumer
reaches the highest possible indifference curve
given his budget.
Conditions For Consumer Equilibrium
Budget line should be tangent
to indifference curve
Slope of Indifference curve
= Slope of budget line
PX
Py
=
MRS XY
Indifference curve should be
convex to origin

88. Good
Y
Good X
A
B
IC1
Y
E
IC2
D
IC3
0 X
Given the
Indifference Map
and budget line
AB is the budget line
IC1, IC2 , IC3 are
the Three
Indifference curve
shows different levels
of satisfaction
Aim of the consumer
is to get Highest
Combination with his
income and
preferences
Explanation

89. Good
Y
Good X
40
40
IC1
Y
E
IC2
D
IC3
Consumer Equilibrium
0
X
Point to the right of E is
desirable but not
affordable ( IC3)
Point to the left of E is
attainable but gives
lower satisfaction
( IC1)
At point E both the conditions
are getting true AT IC2
G
H
•Budget line is tangent to the indifference
curve
•Slope of indifference curve = slope of
budget line
F
Case 1st
Case 2nd
Case 3rd
PX
Py
=
MRS XY

90. Basis Cardinal Utility
Approach
(Diminishing
Marginal (Utility
Approach)
Ordinal Utility Approach
(Indifference Curve )
DIFFERENCE BETWEEN
Measurement Utility can be
measured is
numerical terms.
Utility can be ranked
Method
The number 1, 2, 3
are cardinal
numbers
15 Utils -- A
10 Utils -- B
5 Utils -- C
It can be place like
1st: A
2nd: B
3rd: C
Measurable
Cardinal Utility is
measurable and
quantitative
Given By This Concept was
given by J.R. Hicks
The concept was
given by Alfred
Marshal
Ordinal Utility is not
measurable and is
Qualitative

91. Basis Cardinal Utility
Approach
(Diminishing
Marginal (Utility
Approach)
Ordinal Utility Approach
(Indifference Curve )
DIFFERENCE BETWEEN
Equilibrium One commodity case PX
Py
=
MRS XY
MUX
PX
=
MUY
PY
MUM
=
Two commodity case
MUm
MUx
Price
=

92. A consumer consumes only two goods X and Y. Money income is Rs 24.
Prices of the good X = 2 and good Y = 1 respectively. Can he buy
a) 8 units of X and 10 unit of goods Y
b) 8 units of X and 8 unit of goods Y
c) What will be MRSXY where consumer is in equilibrium?
Solution
Problem
• Px X QX + Py X QY = B
• 2 X 8 + 1 * 10 = 26
• Cannot afford to buy because his total expenditure exceeds total income
• Px X QX + Py X QY = B
• 2 X 8 + 1 * 8 = 24
• Can afford to buy because his total expenditure equals total income
• Consumer will be in equilibrium where MRSxy = slope of budget line
• ∆Y /∆X= Px/ Py
• 2: 1= 2:1

93. A consumer consumes two goods. The prices of Good X is Rs 4 and Good Y
Rs 5 respectively. The consumer income is given is Rs 20.
a) Write down the equation of the budget line
b) How much of the good X can be consumed if he spends his entire
income on that good
c) How much of the goody Y can be consume if the spends his entire
income on that good
d) Slope of budget line
Solution
Problem
a) Budget Line Equation = Px X QX + Py X QY = B
b) X = Budget / Px = 20/4 =5
c) Y = Budget / Py = 20/5 =4
d) Slope of budget line = Px/ Py = 4/5

94. Good
y
Good X
Y
D
IC
C
0 X
PX
Py
>
MRS XY
PX
Py
=
MRS XY
PX
Py
<
MRS XY
E
Case 1st:- at point C
MRSxy > Slope of Budget
Line. Here consumer gains
and if he continues to
consume more and more
units of X marginal utility
of X falls and MRSxy
starts falling from point
Case 2nd:- at point E
MRSxy < Slope of Budget
line. Here consumer loses
and he has to Increase
more Y and less of X in
order to gain and MRSxy
starts rising from point E
Case 3rd:- at point D
MRSxy = Slope of Budget
line consumer is in
equilibrium.

95. A Consumer has following five different combinations of good X
and Y
Combinations A B C D E
Good-X 2 4 6 8 10
Good-Y 40 30 22 16 12
Price ratio is for X and Y is 3:1.
Calculate Marginal Rate of Substitution and determine Consumer
Equilibrium Situation.
Combinations A B C D E
Good-X 2 4 6 8 10
Good-Y 40 30 22 16 12
M.R.S - 10:2 8:2 6:2 4:2
Solution
Problem
PX
Py
3
1
=
Consumer
Equilibrium
At ‘D-Combination’ Where MRS

96. TEST YOUR KNOWLEDGE
1. What is Indifference Curve?
2. What is Indifference Map?
3. What are the properties of Indifference Curve?
4. What is Budget line? Explain why the Budget line is
downward sloping?
5. What is Marginal Rate of Substitution?
6. What do you mean by ‘monotonic preferences’?
7. How does the budget line change if the consumer’s
income changes?
8. How does the budget line change if the prices of the
products change?
9. Show the consumer equilibrium with the help of
Indifference Curve.

97. 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
0
5
10
15
20
25
30
A
B
C
D
Good X
E
Good
Y
IC
Diminishing
MRS
MRS = 9
MRS = 3
∆9
∆1
∆3
∆1

98. GOOD
Y
GOOD X
IC1
Two indifference curve never
intersect each other
IC2
Because two indifference
curves never gives same
levels of satisfaction
B

99. 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
0
5
10
15
20
25
30
A
B
C
D
POINTS A, B, C, D AND E
gives same level of satisfaction
Good X
E
Good
Y
IC

100. Good
y
Good X
Y
D
IC
C
0 X
PX
Py
>
MRS XY
PX
Py
=
MRS XY
PX
Py
<
MRS XY
E