Microeconomics and Consumer Behaviour: Utility, Demand and Elasticity
The exam tests whether you can apply scarcity, choice and utility maximisation to reasoning and small numerical questions, not merely recite definitions.
Core rules
- Scarcity forces choice; opportunity cost is the value of the next best alternative forgone, measured in real terms.
- The production possibility frontier is concave because marginal opportunity cost rises; points inside it are inefficient, points beyond are unattainable.
- Utility is want-satisfying power. The cardinal approach uses utils; the ordinal approach ranks bundles with indifference curves.
- Law of diminishing marginal utility: as consumption rises, MU falls; TU rises while MU is positive and is maximum where MU = 0.
- Cardinal consumer equilibrium: MUx/Px = MUy/Py = MUm. Ordinal equilibrium: MRSxy = Px/Py, an indifference curve tangent to the budget line.
- A price change moves you along the demand curve; income, tastes, related-good prices, population or expectations shift it.
- Price elasticity = %ΔQ ÷ %ΔP; income elasticity is positive for normal and negative for inferior goods; cross elasticity is positive for substitutes.
Worked example
Px = ₹4, Py = ₹5, MUx = 20, MUy = 20. Utility per rupee: 20/4 = 5 for X against 20/5 = 4 for Y. X gives more satisfaction per rupee, so the consumer buys more X; as consumption rises MUx falls. Equilibrium arrives when MUx/Px also equals 4, for example MUx = 16 with Px = 4.
Traps
Confusing maximum TU with maximum MU. Treating a price change as a shift of demand. Forgetting indifference curves cannot intersect and are convex to the origin. Mixing up a change in quantity demanded with a change in demand.