Consumer Behavior

Who Is Consumer

Who buy goods and services

to satisfy wants

Main Aim

To get maximum
satisfaction from spending
his income on various goods
 Problem Of Consumer

Has Limited Income Over Unlimited

Wants

And Wants Maximum

Satisfaction
 Consumer Equilibrium

In Economics Equilibrium Means

“ A Position Of No Change”

Benefit Cost
 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
 Consumer Behavior (Two
Approach)

Law Of Diminishing
Indifference Curve
Marginal Utility
Approach(Ordinal)
Approach(Cardinal)

ALFRED MARSHAL J.R HICKS

 Cardinal Utility Approach
(Diminishing Marginal Utility Approach)

As consumer
1 consumes more
4
and more units
of a commodity
his intensity of
2 the want goes on 5
falling and a
point is reached
when he want no
more units of it
3 6
 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

 General Assumption of law of DMU
Continuous consumption
There should be continuous consumption with any interruption

Utility is cardinally measurable

The utility can be measured in cardinal numbers such as 1, 3, 10, 15, etc.

Rationality
The aim of the consumer should be to get the maximum satisfaction

Diminishing marginal utility

Marginal utility obtained from the consumption of a good diminishes
continuously as its consumption is increased.

Standardized Commodity
There is no change in the unit of quantity & quality of commodity consumed by
the customer
Why Consumer Consume Commodity.?

Consumer Consume The

Commodity Because It Give
Them Happiness Or
Satisfaction
 Utility Concept

Utility refers to the want satisfying power of a

commodity.

Cloth has a utility for us

because we can wear it.

Pen has a utility who can

write with it.

Utils

An imaginary unit used to measure utility.

 Characteristics Of Utility

Utility Is Relative Term

It changes from time to time person to person and place to place

Utility Is Subjective Term

. It cannot be measure but for the sake of the convenience we assume it can
be measures in terms of utils.

Utility is not essentially useful

. Higher utility does not means greater usefulness. Cigarettes may give
utility to a smoker but are not useful otherwise
 Concept Of Utility

Initial Utility Marginal Utility Total Utility

Initial Utility
Utility obtain from the consumption of first unit of
the commodity
Marginal Utility
The net addition to the total utility when
one more unit of commodity is consumed
∆ TU
MU =
∆ Q

MU = TUN TUN-1

Where
MU = Marginal Utility
∆TU = Change in Total Utility
∆ Q = Change in Quantity
TUN = Total utility from N units
 Total Utility
It is the sum of the utilities of all the units
consumed

TU = ∑MU

Where
TU = Total Utility
∑MU = Sum Of Marginal Utility
Relationship Between Total Utility And Marginal Utility

Units Marginal Total Utility Marginal utility is

Utility positive up to 5
units
1 10 10
2 8 18
3 6 24 At 6th unit MU is
0 and TU is
4 4 28 maximum

5 2 30
6 0 30 After 6TH Unit
MU becomes
7 -2 28 negative and TU
8 -4 24 decreases
 Saturation
Point
When TU Is Rising
MU Curve Falls But)
Positive( up to 5th 35

Unit)
30

25

When TU Is 20 TU
Maximum, Called

MU/TU
Saturation Point MU 15
Is Zero (At 6th Unit)
10

When TU Is Falling, 0
MU Curve Becomes
1 2 3 4 5 6 7 8
Negative(after 6th -5
Unit) Quantity MU
-10
Problem
What happens to marginal utility when total utility is maximum.?

Solution
Marginal utility is zero

Problem
What happens to total utility when marginal utility is negative.?

Solution
Total utility start falling

Problem
What happens to total utility when marginal utility is positive.?

Solution
Total utility is rising
Problem

AMOUNT TU MU
1 50 50
2 90
3 30
4 140
5 155

Solution

AMOUNT TU MU
1 50 50
2 90 40
3 120 30
4 140 20
5 155 15
 Three realistic condition
For consumer equilibrium

[Link] there is single commodity and buyer has not to

pay the PRICE

[Link] there is single commodity and buyer has to pay

the PRICE

[Link] there is two commodity and buyer has to pay

their PRICE
 CASE 1 When buyer does not have
to pay any PRICE

PINKU likes
Burger very
Much.

PINKU
Now how Much burger
PINKU should Eat so
that
He can get maximum
Satisfaction

Assume
Burger Is Free
Of Cost
Quantity Marginal
Utility

1 10 12

MU
2 8
4
3 6
4 4 1 2 3 4 5 6 7
MU
Quantity
5 2
Consumer
6 0 Equilibrium

7 -2

He will continue his consumption till

MU = ZERO
CASE 2
Consumer Equilibrium (One Commodity Case)

Now lets us see

What will happen if PINKU
has to pay some price
 Naturally PINKU will
Buy the good only
If the benefit in the form
Of utility is equal to the
price
 Conditions For Consumer Equilibrium

1 MU Of The Product = Price Of The Product

Benefit = Cost

2 MU Of Commodity keeps on falling with each

successive unit ( law of diminishing marginal utility)
Suppositions
Price of the burger is RS 2
 Price of the burger is RS 2

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 1

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 2

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 Equilibrium MU x = Price
6 2 0 MU x < Price

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
When equilibrium is disturbed

What happens when MUX Not equal to is PX

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 MUY
PX = PY
When equilibrium is disturbed
MUX MUY
What happens when Not equal to is
PX PY

Case 2nd

MUX MUY
When <
PX PY

•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 MUY
PX = PY
Problem
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.
Units 1 2 3 4 5 6
Total Utility 20 36 50 62 68 60
Marginal 20 16 14 12 6 0
Utility

Solution
Units 1 2 3 4 5 6
Total Utility 20 36 50 62 68 60
Marginal 20 16 14 12 6 0
Utility

Consumer will be at equilibrium at 4th unit

Price = MU Of A Product

12 = 12
 Problem
A commodity has Rs. 10 as price per unit. His total utility schedule is
given below. Determine his equilibrium point.
Units of Good 1 2 3 4 5 6
Total Utility 20 36 48 58 66 72

Solution
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
 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
Law Of Equi Marginal Utility/two commodity case
According To This Law Consumer will be in
Equilibrium when utility gained from last Rupee
on each commodity is equal.

Condition For Consumer Equilibrium

1. Marginal utility of the last rupee of expenditure on
each good is the same.

MUX MUY
=
PX PY

2. Marginal utility of a good falls as more of it is

consumed.
Suppositions

Price of the GOODS X is RS 1

Price of the GOODS Y is

RS 1
 Consumer will be in equilibrium by consuming
7 Units Of Goods X
5 Units Of Goods Y

Both The Condition Are Getting True

MUX MUY
1. PX = PY
=
6 6
= =
1 1
2nd Condition:-Implies that the law of diminishing MU is operating.

If MUx remains unchanged, then

MUX MUY
PX = PY

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.
When equilibrium is disturbed
MUX MUY
What happens when Not equal to is
PX PY

Case 1st
MUX MUY
When >
PX PY

•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 MUY
PX = PY
When equilibrium is disturbed
MUX MUY
What happens when Not equal to is
PX PY

Case 2nd

MUX MUY
When <
PX PY

•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 MUY
PX = PY
Problem
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

Solution

According To principal of equi-marginal utility a consumer

gets maximum satisfaction only when…
MUX MUY
PX = PY

But MUX MUY

when PX
> PY

He will buy more of X- good by which MUx will fall till

MUX MUY
PX = PY
Problem
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.

Solution

•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 MUY
PX = PY
Problem
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.

Solution

According To principal of equi-marginal utility a consumer

gets maximum satisfaction only when…
MUX MUY
PX = PY

But 5 4
when 4
> 5

He will buy more of X- good by which MUx will fall till

MUX MUY
PX = PY
 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
 Indifference Curve Approach

According to this Bundle Ranking

approach consumer
can rank the (5,5) Ist
bundle and tell
which bundles is (4,5),(5,4) 2nd
best
Based on (3,4),(4,3) 3rd
preferences
 Three steps involved in the Study of consumer
behavior

Consumer Preferences
Why people prefer one good to another

Budget Constraints
People have limited incomes

Consumer Equilibrium
What amount goods be purchased for maximum satisfaction
 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

Consumption Bundle
Combination of the two goods is called a
consumption bundle

Example

The bundle (5,10) consists of 5 units of Good 1

and 10 units of Good 2
 Between any two bundles

Consumer can either be

Indifferent Monotonic
Same satisfaction Different satisfaction
 Indifferent Monotonic
Same satisfaction Different satisfaction

25,1 10,10

16,2 8,7

10,3 6,4

If consumer rank and select

If consumer picks any best bundle his preferences
bundles he is indifferent are monotonic
(same satisfaction) (different satisfaction)

10,10
25,1 16,2 10,3

8,7

6,4
 Monotonic Preference

Between The Two

Bundles Consumer’s chooses a
Which Bundle Is
Better
bundle which gives
more of both the goods
or at least one good
10,10 9,10
without reducing the
10,9 9,9
quantity of the other
good
10,9 9,8

More Is Always
Better Than Less
Indifferent scheduled
Basket
Y X
Table Showing A 25 1
different
B 16 2
combinations of
two goods that C 10 3
yield the same
D 7 4
level of
satisfaction E 6 5
Problem

If a consumer has monotonic preferences can

he be indifferent between the bundle (6,4) and
(5,3)

Solution

No he can’t be indifferent because both the

goods in second bundle have fewer goods
Problem
Suppose a consumer’s preferences are monotonic.
What can you say about his preferences ranking
over the bundle (20, 20) (20, 18) (18, 18)

Solution
His most preferred bundle would be (20, 20). He
cant be indifferent because given bundles gives
different satisfaction.
Indifference Curve

Graphical representation showing different

combinations of two goods that yield the same
level of satisfaction
 BASKET Y X MRS
POINTS A, B, C, D AND E A 25 1
can be connected to form
B 16 2 9:1
the indifference curve
represents possible C 10 3 6:1
combinations of good X and D 7 4 3:1
good Y E 6 5 1:1

30
A

25
GOOD Y
B
20

15 C

D
E
10

5 IC
0
0 1 2 3 4 5 6
GOOD X
 POINTS A, B, C, D AND E
gives same level of satisfaction

30
A

25
Good Y
B
20

15 C

D
E
10

5 IC
0
0 1 2 3 4 5 6
Good X
 Y
Indifference Map
•A set of Indifference
Curves, each
representing a different

GOOD Y
level of utility.
IC3
•Where Higher
Indifference Curve IC2
gives higher level of
satisfaction or VICE- IC1

VERSA
O GOOD X X
 Y Most Preferred bundle
(contains more ) of both
goods

GOOD Y E
IC3

H IC2

IC1

0 X
GOOD X

Least preferred bundle

(contains less ) of both
goods
Marginal Rate Of Substitution
Amount of good Y that consumer is willing to give
up to get an additional unit of good X .

BASKET Y X MRS

A 25 1
∆Y
MRS XY = B 16 2 9:1

∆ X C 10 3 6:1
D 7 4 3:1
E 6 5 1:1
 Marginal Rate Of Substitution

30
A

25
∆9 B
20

GOOD Y
15 ∆1 C

D
10 E
∆3
∆1 IC
5

0
0 1 2 3 4 5 6
Good X

∆Y
Slope Of Indifference Curve = MRS XY =
∆ X
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

30
A Diminishing
MRS = 9 MRS
25
∆9 B
20
Good Y

15 ∆1 C MRS = 3
D
10 E
∆3
∆1 IC
5

0
0 1 2 3 4 5 6
Good X
 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.
 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
GOOD Y

IC1

GOOD X
 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
GOOD Y

IC1

GOOD X
 Two indifference curve never
intersect each other
Because two indifference
curves never gives same
levels of satisfaction

GOOD Y

B IC2

IC1

GOOD X
 Convex To The Origin
It is convex to the origin due to
diminishing marginal rate of
substitution(MRS)

30
A Diminishing
MRS = 9 MRS
25
∆9 B
20
Good Y

15 ∆1 C MRS = 3
D
10 E
∆3
∆1 IC
5

0
0 1 2 3 4 5 6
GOOD X
 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
GOOD Y

IC2

IC1

GOOD X
 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.

= PX x QX + PY x QY <= B

Px = Price of X
Qx = Quantity of X
Py = Price of Y
Qy = Quantity of Y
I = INCOME of the consumer
 Consumer budget

Assume consumer has 40 Rs

Price of the GOODS X is RS 10

Price of the GOODS Y is

RS 10
 BASKET Good X Good Y INCOME
(Price Rs 10) (Price Rs 10)
A 0 4 40
B 1 3 40
C 2 2 40
D 3 1 40
E 4 0 40

6 The Budget Line

5
A
Graphical presentation
4 B showing all combinations
GOOD Y

of two commodities that

3 C
consumer can buy with
2 D
the given income and
1 E prices.
0
0 1 2 3 4 5 6
GOOD X
 Unaffordable
bundle

6
5
A
4 B

Exact

GOOD Y
3 C
bundle
2 D

1 E

0
0 1 2 3 4 5 6
GOOD X

Affordable
Bundle
Budget Line Equation = PX x QX + PY x QY = B
Slope Of Budget Line

•The slope indicates the rate at which the two

goods can be substituted without changing the total
income

Px
Slope Of Budget Line = ∆Y
Or
Py ∆X
 DIFFERENCE BETWEEN
Budget Set Budget Line
Collection of those bundles Collection of those bundles
that the consumer can afford that can be purchase by
to purchase with his money- spending all his money income
income at the given prices of
the goods

Show all bundles less than Show all the bundles which
or equal to budget are exactly equal to budget

Budget set:- Budget Line:-

PX X QX + PY X PX X QX + PY X
QY <= B QY = B
 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 0,5 5,0 4,2 3,3

0,1 2,0 2,1 1,2

2,3 3,2
0,2 3,0 3,1 1,3
4,1 1,4
0,3 4,0 4,1 1,4

0,4 5,0 2,2

0,5 2,3 3,2

 Budget Line May Change Depending On

Change in the Change in the

price of the income of the
commodity consumer
 Price Of
Rs 1
Goods X
80
Price Of
Rs 1
Goods Y
60
GOOD Y

Consumer’s Income Rs
40 40

20

0 20 40 60 80
GOOD X
 Effect Of Changes In
Income(rises)

What happens
80 When income rises from
Rs 40 to 80
60
Budget line will shift
outward (can buy more of
GOOD Y

40
both of the goods)

20

0 20 40 60 80
GOOD X
 Effects Of Changes In
Income(falls)

80
What Happens
When Income Falls From
Rs 40 TO 20
60
Budget line will shift
inward (can buy less
GOOD Y

40
of both the goods)

20

0 20 40 60 80

GOOD X
 Effects Of Changes In
Prices(falls)

What happens
80
When prices of both the
Goods falls from
GOOD Y 60 Rs 1 to 50 paisa

Budget line will shift

40 outward (can buy more
of both of the goods)

20

0 20 40 60 80

GOOD X
 Effects Of Changes In
Prices(falls)

What Happens
80
When Prices Of Both The
Goods Rises From
GOOD Y
60 Rs 1 To Rs 2

Budget line will shift

40
inward (can buy less
of both the goods)
20

0 20 40 60 80
GOOD X
 If The Price Of One Good Increases
And Other Remains Constant

What Happens
80
When Price Of Good X
Rises From
GOOD Y
60 Rs 1 To Rs 2

The Budget Line Rotates

40 Inward

Could Buy Less Of

20 Goods X

0 20 40 60 80
GOOD X
 If The Price Of One Good Decreases
And Other Remains Constant

What Happens
When Price Of Good X
80
Fall
50 paisa from Rs 1
60
GOOD Y

40 Budget Line Shifts Outward.

Could Buy More Of

20 Goods X

0 20 40 60 80
Good X
 Slope of budget line does not change if
➢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.
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

PX
Slope of Indifference curve MRS =
XY
= Slope of budget line Py

Indifference curve should be

convex to origin
 Explanation
Y
Given the
Indifference Map
and budget line

A
AB is the budget line D
IC1, IC2 , IC3 are
the Three

Good Y
Indifference curve E
IC3
shows different levels
of satisfaction IC2

IC1
Aim of the consumer
is to get Highest 0 B X
Combination with his Good X
income and
preferences
 Consumer Equilibrium
Case 1st
Y
Point to the right of E is PX
desirable but not MRS XY =
affordable ( IC3) Py
Case 2nd 40
D
Point to the left of E is
G
attainable but gives lower

Good Y
satisfaction ( IC1) E
IC3
Case 3rd
H IC2
At point E both the conditions F
are getting true AT IC2 IC1
0
40 X
•Budget line is tangent to the indifference Good X
curve
•Slope of indifference curve = slope of
budget line
 DIFFERENCE BETWEEN
Basis Cardinal Utility Ordinal Utility Approach
Approach (Indifference Curve )
(Diminishing
Marginal (Utility
Approach)
Measurement Utility can be Utility can be ranked
measured is
numerical terms.
The number 1, 2, 3
Method
are cardinal It can be place like
numbers 1st: A
15 Utils -- A 2nd: B
10 Utils -- B 3rd: C
5 Utils -- C

Cardinal Utility is Ordinal Utility is not

Measurable
measurable and measurable and is
quantitative Qualitative

Given By The concept was

This Concept was
given by Alfred
Marshal given by J.R. Hicks
 DIFFERENCE BETWEEN
Basis Cardinal Utility Ordinal Utility Approach
Approach (Indifference Curve )
(Diminishing
Marginal (Utility
Approach)
Equilibrium One commodity case PX
MUx MRS =
=
XY
MUm
Py
Price

Two commodity case

MUX MUY
= = MUM
PX PY
 Problem
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
• 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
Problem
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
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

Case 1st:- at point C
MRSxy > Slope of Budget
Line. Here consumer gains
and if he continues to PX
consume more and more MRS XY
>
units of X marginal utility Y Py
of X falls and MRSxy
starts falling from point
C PX
MRS XY =
Case 2nd:- at point E Py
MRSxy < Slope of Budget
line. Here consumer loses PX

Good y
MRS <
and he has to Increase XY

D
more Y and less of X in Py
order to gain and MRSxy E
starts rising from point E
IC

Case 3rd:- at point D 0

MRSxy = Slope of Budget X
Good X
line consumer is in
equilibrium.
Problem
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.
Solution

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

Consumer PX 3
Equilibrium
At ‘D-Combination’ Where MRS =
Py 1
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.
 30
A Diminishing
MRS = 9 MRS
25
∆9 B
20

Good Y
15 ∆1 C MRS = 3
D
10 E
∆3
∆1 IC
5

0
0 1 2 3 4 5 6
Good X
 Two indifference curve never
intersect each other
Because two indifference
curves never gives same
levels of satisfaction

GOOD Y

B IC2

IC1

GOOD X
 POINTS A, B, C, D AND E
gives same level of satisfaction

30
A

25
Good Y
B
20

15 C

D
E
10

5 IC
0
0 1 2 3 4 5 6
Good X
 PX
MRS XY
>
Y Py

C PX
MRS XY =
Py

PX

Good y
MRS XY <
D
Py
E

IC

0 X
Good X
FOR COMPLETE ANIMATION
BASED PPT SLIDES
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