Indian Economy Quiz: Consumer Behaviour: Utility and Indifference Curves

Marshall, in his Principles of Economics, built the theory of demand on the assumption that utility is measurable in imaginary units, so that a consumer can compare the ten utils of a cup of tea with the six utils of a samosa; from this assumption he derived the law of…

Marginal utility is the addition made to total utility by one more unit, so as long as it is positive total utility keeps rising; the moment it becomes zero nothing more is being added and total utility stands at its highest point, called the point of satiety.

The marginal rate of substitution of X for Y is the number of units of Y a consumer is willing to give up to get one more unit of X while remaining on the same indifference curve, and it equals the ratio of the marginal utility of X to the…

As a consumer moves down an indifference curve he holds more and more of the first good and less of the second, so each extra unit of the first is worth fewer units of the second to him; the slope therefore becomes flatter from left to right and the curve…

If two curves crossed, the combination at the crossing point would belong to both and would therefore give two different levels of satisfaction at the same time, a logical contradiction; for the same reason they cannot even be tangent.

The budget line is the equation Px·X + Py·Y = M, which on rearranging gives Y = M ÷ Py minus (Px ÷ Py)·X, so the intercept is income divided by the price of Y and the slope is the ratio of the price of the good on the horizontal…

Equilibrium is the point at which the budget line is tangent to the highest indifference curve the consumer can reach, and at a point of tangency the slopes of the two are equal, which means MRS of X for Y equals Px divided by Py; a second condition is that…

In their joint work of 1934, and later in Hicks's Value and Capital, they replaced the measurement of utility with the ranking of preferences and rebuilt the theory of demand on indifference curves, the marginal rate of substitution and the budget line.

The law of equi-marginal utility, called Gossen's second law and also the law of maximum satisfaction, says that a consumer distributes his income among goods so that the last rupee spent on each gives him the same marginal utility; he reaches that position by substituting the good with the higher…

If two goods are perfect substitutes, such as two brands of identical salt, the consumer is willing to exchange them at a fixed rate whatever quantity he already holds, so the marginal rate of substitution is constant and a constant slope means a straight line.