Theory of Consumer Behaviour
Theory of Consumer Behaviour tests how households choose among goods under a budget constraint. BIEAP expects command of utility analysis, indifference curves, budget lines, consumer equilibrium, demand curves and elasticity.
Core rules
- Cardinal utility assigns numerical utils; marginal utility falls as consumption rises, which explains a downward-sloping demand curve.
- Ordinal utility uses indifference curves. An indifference curve is downward sloping, convex to the origin, and higher curves mean higher satisfaction.
- The marginal rate of substitution (MRS) is the slope of an indifference curve and diminishes along it.
- The budget line’s slope is the price ratio Px/Py; income changes shift it, price changes rotate it.
- Consumer equilibrium under ordinal analysis occurs where MRS = Px/Py, or where the budget line is tangent to the highest attainable indifference curve.
- Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price.
Worked example
A consumer spends ₹10 per unit of X and ₹20 per unit of Y. The budget line slope is 10/20 = 1/2. If MRS is 1, the consumer values X more than the market requires and should buy more X and less Y until MRS falls to 1/2.
Traps
Do not say a higher indifference curve is “more affordable”; affordability depends on the budget line. Do not confuse a movement along a demand curve (price change) with a shift (income, tastes, related prices). Inferior goods have negative income effects, but they are not the same as Giffen goods.