This PPT explains the consumer behaviour topic of class 12 Economics. It will be helpful for commerce students and for Teachers looking for a teaching aid.

1. Theory Of Consumer Behaviour
Class 12 – CBSE
Economics (Part – 1)

2. Synopsis
1. Concept Of Utility
2. Consumer Budget
3. Budget Set, Budget Constraint, Budget Line
4. Budget Line Equation
5. Slope of the Budget Line
6. Changes In Budget Line
7. Changes In Income and Price
8. Preference of a Consumer
9. Indifference Curve Analysis
10. Marginal Rate of Substitution
11. Consumer Equilibrium in case of Indifference Curve
12. Approaches of Utility Analysis
13. Relation between TU and MU
14. Consumer Equilibrium in case of Single Commodity and in case of Two
Commodities

3. Concept of utility
Consumer - A consumer is one who buys goods and services for
satisfaction of his wants.
Utility - The want satisfying power of a commodity.
Consumption Bundle - An individual's consumption bundle is the
collection of all the goods and services consumed by that
individual.

4. Consumer Budget
A budget constraint represents all the combinations of
goods and services that a consumer may purchase
given current prices within his or her given income.
Consumer Budget states the real income or purchasing
power of the consumer from which he can purchase
certain quantitative bundles of two goods at given
price.
It means, a consumer can purchase only those
combinations (bundles) of goods, which cost less than
or equal to his income.

5. Budget Set
A budget set or
opportunity set
includes all possible
consumption bundles
that someone can
afford given the
prices of goods and
the person's income
level.

6. Budget Constraint
A budget constraint represents all the combinations of
goods and services that a consumer may purchase given
current prices within his or her given income.
The inequality shown below is a Budget Constraint.
P1:Price of good 1
P2:Price of good 2
X1:Units of good 1
X2: Units of good 2
M: Income of a consumer

7. Budget Line
Budget line is a graphical
representation of all
possible combinations of
two goods which can be
purchased with given
income and prices, such that
the cost of each of these
combinations is equal to the
money income of the
consumer.

8. Budget Line Equation
Given the money income of the consumer and prices of
the two goods, every combination lying on the budget
line will cost the same amount of money and can
therefore be purchased with the given income.
The budget line can be defined as a set of combinations
of two commodities that can be purchased if whole of
the given income is spent on them and its slope is
equal to the negative of the price ratio

9. Slope Of Budget Line
P1X1 + P2X2 = M (1)
P1(X1 +ΔX1) + P2(X2 + ΔX2) = M (2)
Subtracting equation (2) from (1)
We get:
P1*ΔX1 + P2*ΔX2 = 0
Rearranging terms, we get the slope of the budget line

10. Changes In Budget Line
A Budget set or a Budget line
shifts due to :
1. Change in Income:
Increase in Income
Decrease in Income
Budget line rotates due to:
2. Change in prices of the
commodity

11. Changes In Income

12. Changes In Prices

13. Preferences Of A Consumer
Consumer’s behaviour is governed by monotonic
preferences. Monotonic Preferences refers to a
situation, where the consumer will prefer more of a
commodities than the combination providing lesser
commodities.
OR
A consumer’s preferences are monotonic if and only if
between any two bundles, the consumer prefers the
bundle which has more of at least one of the goods and
no less of the other good as compared to the other
bundle. Example: (9,8) > (9,7)

14. Indifference Curve Analysis
An indifference curve is the curve, which represents all
those combinations of two commodities, which give same
level of satisfaction to a consumer. Each point on IC
represent same level of satisfaction.
Properties of Indifference curve:
It slopes downward to the right.
It is convex to the origin.
Two indifference can never intersect.
It never touches any axis.
Higher indifference curve shows higher satisfaction level.

15. Indifference Curves

16. Marginal Rate Of Substitution
MRS refers to the rate at which the consumer
substitute one good to obtain one more unit of the
other good.
Key points about MRS:
•The slope of the Indifference curve is MRS = Δy/Δx
•MRS is never constant, it varies over the IC.
•As we move along Indifference Curve, MRS falls also
called Diminishing Marginal rate of substitution.

17. Calculating Marginal Rate Of Substitution

18. Consumer’s Equilibrium Using Indifference Curve
Analysis
According to indifference Curve Analysis the conditions
required to achieve consumer equilibrium are:
1. Where the slope of the indifference curve is equal
to the slope of budget line
MRSxy=Px/Py
Slope of IC = Slope of Budget line
2. The indifference curve must be convex to the origin
at the point of tangency.

19. Graphical Presentation Of Equilibrium Under IC
Analysis

20. Approaches Of Utility Analysis
1. Cardinal Utility Approach: It was given by Alfred
Marshall. It refers to the measurement of utility in
terms of numbers as 1,2,3, etc. The unit of
measurement under this approach is ‘utils’.
Example: A basket of oranges offers 10 utils of
utility to a consumer.
2. Ordinal Utility Approach: It was given by Allen and
Hicks. It refers to the measurement of utility in
terms of psychological satisfaction and a consumer
can just rank his preference from a set of most
preferred to least preferred bundles.

21. Cardinal Utility Analysis
Cardinal utility has two concepts:
1. Total Utility
2. Marginal Utility
1. Total Utility: It refers to total satisfaction obtained from
the consumption of all possible units of a commodity.
TUn = U1+ U2+ U3
TUn = MU1+ MU2+ MU3
TUn = ∑MU

22. Cardinal Utility Analysis
2. Marginal Utility (MU) : It is the additional utility
derived from the consumption of one more unit of
the given commodity.
MUn = TUn – TUn-i
MUn = Change in Total Utility/ Change in number of
units
MUx = ΔTUx/ΔQx (When units do not change in
consecutive order)

23. Relation between TU and MU

24. Law Of Diminishing Marginal Utility
This law states that ‘as a consumer consumes more and
more units of a specific commodity, utility from the
successive units goes on diminishing’ – Mr H. Gossen was
the first to explain this law in 1854.
Assumptions Of LDMU:
Rationality: Consumer aims at maximum utility
Constant MU of Money: MU of money for purchasing
goods remains constant
Diminishing MU: Utility falls from successive units
Continuous Consumption: No time gap
Income : Income of a consumer remains the same

25. Law Of Equi-Marginal Utility
According to this law, a consumer gets maximum
satisfaction, when ratios of Marginal Utility of 2
commodities and their respective prices are equal and
MU falls as consumption increases. Same Assumptions
apply as LDMU.

26. Consumer’s Equilibrium Using Marginal Utility
Analysis
The Conditions of a Consumer equilibrium using
Marginal Utility analysis occurs in two cases:
1. In case of single commodity: Consumer attains
equilibrium when following conditions are met.
It implies that ratio of MU of x over price of x is equal
to MU of money.

27. Consumer’s Equilibrium Using Marginal Utility
Analysis
2. In case of two commodities: In case of two
commodities, consumer attains equilibrium when:
It implies that in state of equilibrium, utility per rupee
obtained by the consumer from good X or good Y
should be equal to Marginal Utility of money.

28. Consumer Equilibrium In case Of Single Commodity

29. Consumer Equilibrium In case Of Two Commodities

30. Thank You!
Lesson by
Anjali Kaur Suri
TGT Maths, PGT Economics
M.A. Economics, M.Com (Finance), PGD Banking & Finance, B.A. Hons (Economics), B.Ed (Maths & SST), NISM,
NSDL and IELTS certified.
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