Theory of Consumer Behaviour
Theory of Consumer Behaviour tests utility analysis, indifference-curve equilibrium and demand, often through numerical MU or budget-line questions.
Utility and demand
Cardinal utility measurably ranks satisfaction; ordinal utility uses indifference curves (ICs). Law of diminishing marginal utility: as consumption rises, MU falls; TU rises while MU is positive and is maximum when MU=0. Consumer equilibrium in cardinal terms: MUx/Px = MUy/Py = MUm; if MUx/Px > MUy/Py, buy more X.
An IC shows combinations giving equal satisfaction. ICs are downward sloping, convex (diminishing MRS), never intersect, and higher ICs mean higher utility. The budget line is PxX + PyY = M; its slope is −Px/Py. Tangency of the budget line and the highest attainable IC gives ordinal equilibrium, where MRS = Px/Py. The demand curve shows an inverse price–quantity relation; movements along it follow own-price changes, shifts follow income, tastes, prices of related goods and expectations.
Worked example
If MUx=20, Px=₹4, MUy=30 and Py=₹6, then MUx/Px=5 and MUy/Py=5, so the consumer is in equilibrium. If Px falls to ₹2, MUx/Px=10 > 5, so the consumer substitutes X for Y until the ratios equalise again; this substitution and income effect helps trace a downward-sloping demand curve.
Traps
TU is maximum at MU=0, not where MU is maximum. Do not say ICs can intersect. A price change moves along the demand curve; a change in income shifts it. Giffen goods are an exception to the law of demand.