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Class 12 Theory of Consumer Behaviour: cheat sheet
CBSE Social Science. How a consumer chooses: utility, the budget line, indifference curves and the optimum, demand and what shifts it, normal and inferior goods, and price elasticity of demand.
Key ideas
- Marginal utility is the extra utility from one more unit; it falls as more is consumed, and total utility is greatest when marginal utility reaches zero.
- The budget line shows bundles costing exactly the whole income; a rise in income shifts it out in parallel, and a fall in one price pivots it out on that good’s axis.
- An indifference curve joins bundles of equal satisfaction; with monotonic preferences it slopes down and higher curves are better.
- At the optimum the budget line is tangent to the highest reachable indifference curve, so MRS equals the price ratio.
- Law of demand: other things equal, quantity demanded falls when price rises. A change in own price moves along the curve; income, tastes and related prices shift it.
- Demand for a normal good rises with income and for an inferior good falls; substitutes (tea, coffee) and complements (tea, sugar) affect each other’s demand.
- If demand is elastic, a fall in price raises spending; if inelastic, spending falls; if unitary, it stays the same.
Remember
| Marginal utility | MUₙ = TUₙ − TUₙ₋₁ (TU = sum of the MUs so far) |
| Budget line | p₁x₁ + p₂x₂ = M; slope −p₁/p₂; most of good 1 = M ÷ p₁ |
| Consumer’s optimum | MRS = p₁/p₂ |
| Price elasticity of demand | eD = % change in quantity ÷ % change in price |
| On a straight line q = a − bp | eD = bp ÷ q = bp ÷ (a − bp); eD = 1 at the midpoint p = a ÷ 2b |
| Market demand | add individual quantities at each price: (a₁ − b₁p) + (a₂ − b₂p) |
| Total expenditure | price × quantity |
Watch out
- Writing the budget-line slope as −p₂/p₁ instead of −p₁/p₂.
- Dividing the % change in price by the % change in quantity (quantity goes on top).
- Calling a change in the good’s own price a shift of the demand curve.
- Thinking a straight-line demand curve has the same elasticity everywhere.
Worked example
The marginal utility of successive bananas is 16, 14, 6, −2, −6, −14. Find the total utility after each one. When is total utility greatest?
Working: TU = sum of MUs so far; TU is greatest where MU last stays positive (or is zero)
Answer: 16, 30, 36, 34, 28, 14; greatest (36) at 3 bananas
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