o6 D55

THEORY OF CONSUMER

B E H A V I O U RM
: ARGINAL

3 uon
U T I L I T Y

CURVE ANALYSIS
A N D I N D I F F E R E N C E

CHAPTER

w hea dud Cok

TUYMOr)

to b
conswnlA C O n s u u n a
u Aod
matimíse
A

in such a way
soas to
2, we have familiarised ourselves aiferentgoods The utility
approach
In Chapter utility. gets
of demand. The law of demand his/her (total c o n s u m e r

uith the law

which a
that the utility be
measured in
price of a commodity falls, the
assumes
as the can
states that commodity
from a unit of
a we
measure

of it increases. The as
amount purchased question in the
same way a
absolute terms How can

that we are
concerned in this chapter is: How
or height of a person.
The
the weight
his/her total
utility?
does a consumer decide how much of a good maximise
household
will maximise
buy at a given price and why does he/she that the consumer
to general rule is his/her income
more of a good when its price falls? The when he/she allocates
buy total utility way that
these questions lies in the theory of commodities in sucha
answer to various
among rupee (or any
consumer
behaviour. In this chapter, we look
marginal utility of thelast
the spent on each commodity
behaviour, with the objective of money)
at the
consumer
other unit
behind the law of MU Muy
of explaining the principles isequal. MO undenstand utisty-maximising
have been developed
demand. Various theories In order to
consumer behaviour.
rule of consumer's equilibrium, it is important
from time to time to explain
of utility, total utility
We discuss below two
such theories: to understand the concepts
1. CardinalUtility Analysis -Marginal Utility,Land utility.
marginal utility.
ahd marginal
utyC bew and
Analysis 3.1.1 Meaning of Utility-Total
2. Indifference Curve
Ordinal
Analysis-
a t be
Marginal Utility
Utility Analysis
un tility refers to the want-satisfying power of
Mk a commodity. It is
the ability or capacity of a
3.1 CARDINAL UTILITY ANALYSIS/ commodity to satisfy the human
want. It is the
MARGINAL UTILITY ANALYSIS commodities
property or quality common to all
has to buy a number of goods which consumers purchase. For example, bread
Every consumer
income. A basic has the power to satisfy hunger; books fulfil
and services with his limited
of household our desire for knowledge; TV satisfies our
assumption of the economic theory
is rational, i.e., desire for entertainment, and so on. In objective
behaviour is that the consumer
from
he or she tries to maximise the total utility terms, utility may be defined as the amount of
his/her purchases, An important question wnichsatisfaction derived from the consumption of a
how he/she should commodity.
a consumer has to decide is:
different goods Following are the main characteristics of
allocate his/her given income on
and services so as to maximise
total utility. A utility:
when helshe 1. Utility is subjective. It depends on the
cOnsumer will be in equilibrium individual's own subjective estimate of the
the purchase of
spends his/her given income on
Con ot at
 and consumes
amount of satisfaction he/she is likely to person buys
Suppose a
to get a
get from a commodity. two mangoes and he/she expects
2. of 17 utils (or say units). Suppose,
utility
Utility is not measurable. Since utility now consumes three mangoes,
1s subjective, it cannot be measured in this perSon
total utility of 21 utils
Objective terms as satisfaction is not and he/she gets a

the thirdthe mango is

measurable. However, some economists In our example,
additional (or one more)
total
mango. The
like Marshall assume that utility is
of this mango increases
measurable. utility on account
The marginal utility
3. Utility is relative in nature. Utility is by 4 utils (21 17 = 4). therefore, 4 utils
of the third mango is,
not absolute but relative because of of 4th mango is 1
its subjective nature. It is relative to a Similarly, marginal utility
util (22 21 1). The fifth mango provides
=

person's need. Utility of a commodity to a

the same amount of
total utility, 22 utils,
person depends on his intensity of desire does not add to totaj
tor the commodity; the greater the need, Thus, the fifth mango
utility. Therefore, marginal utility of
the
the greater is the utility. Therefore, utility total utility of sixth
fifth mango is zero. The
varies from person to person, place to than the total utility of five
place and time to time. mango is less
mangoes. This decrease in total utility means
4. Utility is different from usefulness. Utility that marginal utility is a negative value, Since
does not imply that a good is useful.
total utility decreases from 22 utils to 19 utils,
A commodity may possess utility even of sixth mango equals -3.
marginal utility
it
though may not be useful. For example, When marginal utility is negative, we say that
smoking may have harmful effects, but
a good provides disutility.
even then it has utility so long as it
satisfies the smoking desire of a smoker. Table 3.1 Utility Schedule for Mangoes
5. Utility has n0 ethical, moral or legal
Units of Total Utility Marginal
Connotations. Mangoes (utils) Utility (utils)
Total utility refers to the total satisfaction 0 0 undefined
derived by the consumer from the consumption of
a specific quantity of a commodity, say number
10 utls (10 (10 -0)
ofmangoes. In other words, total utility is the 17 7 (17 10)
sum total of the utilities derived from all the 3 21 4 (21 17)
units consumed of a commodity. For example, 4 2 2q D 1 (22 21)
thetotal utility of consuming two mangoes is the 5AS 22 LO (22 22)
total satisfaction that these two mangoes provide.
Marginal utility refers to the additional 6 19 -3 (19 -22)
utility derived from the consumption_of an Let the number of mangoes consumed be
additional unit of a commodity. It is an addition equal to 'n'. Then, the last mango consumed is
madeto the total utility by consuming one more the nth mango and (n 1)th mango is the one
-

unit of a commodity. For example, marginal before the last. Marginal utility of nth
mango
utility of consuming a third mango is the increase therefore, equals the total utility of n mangoes
in totalutility as the consumption of mangoes is minus total utility of (n - 1)
mangoes
increased from two mangoes to three mangoes.
Thus, marginal utility of nth unit Total
Let us illustrate the difference between total utility of n units - Total utility of (n - 1) units
utility and marginal utility with the help of a
numerical example given in Table 3.1. This table Symbolically.MUahTU-TU
shows a person's total utility and marginal utility Similarly, total utility can be computed as the
Sum of
associated with his purchases of mangoes each marginal utilities of various units of a
day. commodity
TO MU 7
32 FRANK ISC ECONOMICS-X
 utility
marginal
and the
Thus, (TU)
TU MU, +
=
total utility
by plotting
MU, + MU,th ..
The
have
been
drawn
are

wher TU, is total utility from

Lore
(MU)
curves
Units of mangoes

is
n Table 3.1. Utility
MU, MU are marginal units, and MU, data given in axis.

nd and nth units of utilities from the first,

horizontal
the shows
represented
on Panel A
second

a axis.
For example, the total commodity respectively. represented on the
vertical

first,
reaches
the

xhich equals 21 units, utility from 3 utility

increases
There

be found mangoes,
that total decreasing
can then starts
he
marginal utiliies of the first three
by adding maximum and
which
additional

point beyond
10+7+4. mangoes: 1S a satiation
reduces total utility.
Panel

consumption actually marginal

decreasing
Marginal Utility =
The addition made
B shows continuously
curve has
to the the marginal utility
total utility utility. Note that the marginal
by addition a negative slope.
Also note that
of one more become
unit of a horizontal axis to
the
utility curve c r o s s e s
commodity. negative. Thus, marginal
utility decreases,

Total Utility The negativve

of zero, and then
=
turns
sum total of reaches a value
all
marginal utilities. of any
It should be noted that marginal utility
the slope of the
quantity can also be indicated by
3.1.2 Relationship between Total Utility total utility c u r v e . The shaded areas
in Panel A
and Marginal Utility show addition to total utility, ie, marginal utility
There is a definite and well defined
relationship resulting from an increase in the consumption
between total utility and
marginal utility. As
Table 3.1 shows, to begin with, the two are
i.e., total
equal,
utility
and marginal
utility of the first
mango are identical (10 utils). Thereafter, the M MU= O

two become different MU <O

according to a particular MU > O
set order. While the marginal utility keeps on 7
diminishing, the total utility continues to increase U
so long as the marginal utility is positive, i.e., 10
0
the total utility increases so long as the marginal
utility does not drop to zero. However, the rate
of increase in total utility goes on diminishing.
2 3 4 5 6
This happens till 4 mangoes are consumed.
No. of Mangoes
Where marginal utility is zero, total utility is A. Total utility curve
maximum. This takes place when 5 mangoes
are consumed. The economic implication of zero
marginal utility is that you have all you want
of this commodity. In other words, your desire
for this particular commodity is completely
satiated (saturated). After this stage, marginal
utilitybecomes negative and total utility starts
declining. A rational consumer will not like
to
8o beyond the point of maximum total utility. MU = O

The relationship between total utility

be illustrated
and marginal utility can No. of Mangoes
alagrammatically as shown in Fig.
1. The graph
B. Marginal utility curve
in Fig. 1 plots the data in Table 3.1,
Flg. 1 Total and
Marginal Utility Curves

THEORY OF CONSUMER BEHAVIOUR: MARGINAL UTILITY AND INDIFFERENCE CURVE ANALYSIs

33
of tot
mangoes. Panel B of
these Fig. 1 the
relationship
between

e following way
total
shaded areas. The consists simply or We can put
utility
in the

ot Fig. 1 show the shaded areas in Panel A utility and arginal

of the
area is
positive but diminishing (S1/ze as well:
increases
as long
as marginal
al
CO
the 4th unit. decreasing) marginal utility upto 1. Total utility
utility is positive.
The
Marginal utility of 5th unit is zero. is
maximum when
márginal

marginal utility of the sixth unit is negative 2. Total utility

is zerog l a s t
(therefore, the shaded area ufility when marginal
decreases w
the 6th unit in
Panel A is indicated below the
corresponding to
3.u t ibtal utility,
lity becomes negative.

horizontal axis in Panel B). Marginal Utility

Diminishing
The relationship between total Law of AL
utility and 3 Ocs vC
Onsu

marginal utility can be indicated in terms of of the

Law uoR, MU wac
three propositions: Statement Marginal Utility
Diminishing
of economist
The Law
German
1. a
The total utility curve is
concave from formulated by a systematic
initially was g1ven
above which indicates declining slopee
H.H.
Gossen,
but
Marshall. 'The law statee
of the curve, which means declining formulation by
Alfred
a commoditu
TU consumed of
marginal utility. Thus, up to point M, that as the amount
by the consumer
Curve has a positive slope, but its slope the utility derived utilitu
increases, marginal
a d d i t i o n a l units, i.e.,
goes on decreasing steadily as quantity the
from
that
is increased. This shows goes on decreasing
Consumed
to M a r s h a l l ,
The additional
so long as total utility increases, marginal According a given increase
derives from
utility is positive. But marginal utility benefit a person diminishes with every
utility increases
at of a thing
decreases because total in his stock already has.'
in the stock that he
a decreasing rate. increase

is maximum, marginal Alfred Marshall (1842-1924)

2. When total utility
is zero. When total utility c u r v e of
utility its Alfred Marshall,
Professor

reaches its
maximum (at point M), Political Economy (Economics)
another way of
slope is zero, which is was

is zero. at Cambridge University,

that marginal utility economists
saying o n e of the leading

the slope of the

utility total
3. After M, the of his time. His book Principles
that
becomes negative showing Economics was one of
the
curve
when of
is negative. Thus, most important textbook
marginal utility is
declines marginal utility for many years. It enjoyed
total utility
worldwide reputation and decisively shaped
negative.
relationship
between total utility and the teaching of economics in English-speakin8
The
s u m m a r i s e d in Table 3.2. countries.
marginal utility is
Marshall was the first economist to develop
Table 3.2 Relationship between Total and the standard curves of demand and supply, the
Marginal Utilities
relationship between the price and the quantity
When Total Then Marginal demanded and supplied and market equilibrium.
Utility is Utility is He emphasised that price and output of goods
are determined by both demand and supply
1. Increasing at a Decreasing, but is Marshall is also credited for the concept of
decreasing rate positive
elasticity of demand, the law of marginal utility,
2. At the maximum Zero
law of diminishing returns, and notions of
3, Decreasing Negative consumer and producer surplus.

34 FRANK ISC ECONOMICS-XI

 TU, R U
m u 2 TU
whu
Delin
The law of
5lw
explained diminishing marginal utility
J o l a t T o n

be of hours,
with the can the second mango after a couplefrom the
Fig. 1. Table 3.1 help of Table get more utility
of the law. The presents a 3.1 and he/she may
numerical illustration because his/her hunger
table second mango
consumptionbutof nmangoesclearly
is
shows that as the may have increased
meanwhile. The
law

increases at a increased, total utility of diminishing marginal utility

applies
that marginal diminishing
utility decreases withrate. It means
only when the consumption occurs Over

consumption. This is
of the table. shown increase in
in the last
a relatively short time span.
column There should be no change in the prices of
The law of substitute goods. If the prices of substitute
isgraphically diminishing
illustrated marginal utility
which is in
concave from Fig. 1. TU goods change, it may become difficult
curve, to have an idea about the utility that
sloping MU curve above, and the
illustrate
that as the negatively the consumer might get from the main
consumes more and
more units of a consumer commodity.
marginal utility from each commodity, 6.Theutility is measurable
on decreasing. successive unit goes
7.The consumer is rational while taking
Assumptions consumption decisions.
Given these assumptions, the law of
The law of diminishing
marginal utility
under certain given conditions, holds diminishing marginal utility holds universally.
i.e., The generalisation about human behaviour
The main assumptions of the law assumptions.
are: regarding diminishing marginal utility is so
1. All the units
of certain and universal that it is referred to as a
identical i.e., same incommodity
a
must be law. In some cases, e.g., accumulation of
all respects in size, -

money,
colour, design, quality, etc. For example, collection of stamps and old coins, rare
paintings
if the quality of the second mango is
and books, etc.,
marginal utility may initially
superior than the first, the consumer
may
increase, but it does eventually decrease. The
derive nmore
utility from the second law of diminishing marginal utility
than from the first. mango is generally
applicable.
2. The unit of the good
e.g, a
must be
cup of water, a bottle of cold drink,
standard Explanation of the Law Y Mu t
What is the basis of law of
a
pair of shoes, a full mango, a glass of diminishing marginal
water. The units of the utility? There are two major explanations of this
commodity should
law:
not be too small or too large. Otherwise, 1. The first
the law will not hold. explanation is that as more
3. There should be no change in taste and more quantity ofa commodity
during the process of consumption. If a is_consumed, the intensity of desire
consumer's taste changes so that he or decreases, and therefore, the utility
she likes a commodity more, the marginal derived from the additional unit decreases.
For exanmple, if
utility of additional unit of the commodity we are
hungry and we eat
may rise. mangoes, wewould get a larger utility
from the first mango because
4. There must be continuity in consumption
of our hunger is
intensity
and if a break in the continuity is necessary, very high. When we
eat the second
the time interval between the consumption mango, we derive a lower
satisfaction because intensity of our
of two units must be short, In other words, hunger is reduced. As we
different units of a commodity should be go on eating
For example, if a
more
mangoes, the intensity our hunger
of
Consumed continuously.
goes on decreasing and, therefore, the
person consumes the first mango now and
from it and c o n s u m e s
utility we derive from the successive units
gets some utility goes on decreasing.

THEORY OF CONSUMER BEHAVIOUR: MARGINAL UTLIY AND INDIFFERENCE CURVE ANALYSIS

35
 and remain
ins
is given
2. The income
second explanation is that if there 5. Consumer's

Constant.
aremany uses of a commodity, the most commodiues are assumed
other
6. Prices of
urgent requirement will be fulfilled first
to be given.
followed by the next important use, ana Equilibrium with
Consumer's
so on. For example, if limited electricity is of
Explanation and Graph
available, it may be used for lighting only; the Help of
Schedule
equilibrium h,
consumer's
if more electricity becomes available, it
we
illustrate
case. Suppos
Initially, commodity

may be used for cooking. Marginal utility a simple

one

given money ne incomo

of electricity diminishes because electricity taking with
certain
relevant
that a
c o n s u m e r

commodity,
X. The nt
uses as
is being used for less important only
one
of X should
c o n s u m e s

much quantity
is made how
as to
additional quantity of electricity question
here is
at its given
price so
available. c o n s u m e r
purchase answer tothis
the The simple
equilibrium? that much
reach the purchase

3.1.A Cons umer's Equilibrium through

should

given price so
c o n s u m e r

the a t its
is that
Cardinal Utility Approach-One of the
commodity
utility from
quantity maximise
the total
Commodity Case that he/she
can consumer
utility-1maximising
A
he/she purchases
cardinal
basic concept of his/her purchase.
Having understood the decides equilibrium when where the
how a c o n s u m e r will be in
utility, let us explain of the commodity
money
income
that much quantity equals its
how to allocate his/her given hoW a of the commodity
and services, i.e., marginal utility w h i c h the consumer
o n different goods will be (price)
A consumer Since money the commodity
Consumer attains equilibrium. price a unit of
given to purchase
equilibrium when he/she spends his/her has to spend
both gives
him/her utility,
in of different goods
and
the commodity
income the purchase
on
and the money (income)
either spend
his/her total utility. he/she c a n o r keep it
services so as to maximise of the commodity
which
the ideal position towards o n the
purchase
Equilibrium is of a commodity
It is the position himself. If marginal utility
utility of money
will like to
move. with
under
than the marginal
Consumer

as the best
household regards is greater the
which the has to give to purchase
which the
consunmer
given circumstances. consumer
utility-maximising
will
commodity, a money
in exchange for
Assumptions the commodity
determination of consumer's purchase increase total utility by
the can
i.e., the
consumer
While explaining assumptions: at
make the following more units of the commodity
equilibrium, w e purchasing
is rational, utility of X
assumed that the
price. Thus, if marginal
consumer

1. It is the utility
its lower > P.
ie., he/she aims
at maximising
is greater than the price of X (i.e., MU,
from his/her purchases. can increase his/her total utility
terms, the c o n s u m e r
2. Utility can be
measured in money more if
units of X. Likewise,
one unit of a commodity
by purchasing
i.e, the utility of is less than its price
amount of money (price)
which marginal utility of X
can increase his
equals the The (i.e., MU, < P), the
consumer

consumer is prepared to pay for it. of X. He/She

a makes the assumption total utility by consuming less units
utility approach will maximise total utility when marginal utility
Cardinal utility means

ofcardinal utility. derives from of a commodity equals its price.

that utility that a consumer

be measured in Symbolically, consumer 's equilibrium is

a unit of commodity can
absolute terms. attained when
3. The law of diminishing marginal utility MU, - P,
operates.
4. The utility of each unit of money, such as where MU, is Marginal utility of commodity A
a ten-rupee note, remains constant. P, shows price of commodity X.

36 FRANK ISC ECONOMICS-XI

 O
Hovo T
ibmwm
Qttan Eu DIm. m
Table app.)(CAd 67
3.3Marginal Utility
y bf bt Shir
Sh
achlAdinal
Therefore, the
consumer
U
can

LUnits of Shirt the shirt is

600.
purchasing
2nd

Marginal Utility (in ) Increase his/her

total utility by
below E, MU
< P

shirt. Likewise, at any point

c700 u therefore,
increase his/her

650 Ihe c o n s u m e r can,

For
his/her purchase.
600 Sattstaction by reducing
Muy instance, the consumer will not like to purchase
500 the 4th shirt because it gives him/her utility equal
350 to R500, which is less than the price of
the shirt
Consumer's equilibrium in 600). Thus, point E is the point of equilibrium
case is illustrated by single commodity
a
where MU of shirt is the price ot thne
Table 3.3 and in F1g. 2.
a
numerical example equal to
in shirt.
wants to purchase shirts.Suppose the consumer
(measured in He/She gets utility 3.5 Law of Equi-Marginal Utility S
terms of
money) from different
units of shirt as indicated
e have explained
obvious from Table 3.3 that Table 3.3. It is We explainea aabove the consumer's
in
the in equilibrium case. In
a single commodity
marginal utility equal to R700 fromconsumer
the
gets
reality, however, the consumer consumes a
As he consumes first shirt.
(buys)
the marginal utility additional units of shirt, large number of goods. Our income, no matter
goes on
the shirt is assumed to be diminishing.
R600.
Price of how large it is, limits what we are able to buy.
Every consumer has to buy a number of goods
and services with his/her limited income. The
budget constraint- consumer's income-curbs
the amount of total utility that can be obtained.
Consumers maximise utility subject to their
Consumers
Equilibrium (P = MU) budget (income) constraint. A consumer will
7065
be at equilibriumwhen he/she allocates his/her
600

5 given income on the purchase of different goods

500 in such a way that he/she maximises total his/her
350
utility. The law of equi-marginal utility is of
great help in solving this question of consumer's
MU equilibrium. This law says:
"The consumer maximising his/her total
utility will allocate his/her income among
2 3 4 5
various commodities in such a way that the
Number of Shirts marginal utility of the last unit of money
201
Fig.2 Consumer's Equilibrium
(rupee) spent on each commodity is equal
Let us
explain this utility-maximisation rule of
In
Fig. 2, MU curve is the marginal utility consumer's equilibrium in detail. The
Curve of shirts. The downward sloping MU utility of a
marginal
rupee we
spend on a good equals the
Curve indicates the law of diminishing marginal marginal utility of the good divided by the price
utility. The horizontal line P shows the price of we pay for it. Let us
denote the marginal
a shirt. The MU curve and of the last unit of utility
price line P intersect commodity X by MU, and its
each other at point E. Therefore, the consumer price by Py then marginal utility per
is in equilibrium at point E, where the MU = P. on X will be: rupee spent
MU/Py. For example, if last unit of
In our example, this condition is satisfied when commodity X adds 20 units to utility, and price of
he/she purchases 3 shirts. At any point above E, X is R4, the
marginal utility per rupee is 20/4 5.
MU > P For instance, the 2nd shirt gives him/ Similarly, MU,/P, (where MU is the
her satisfaction equal to R650, while the price of utility from the last unit of, marginal
commodity Y, and
MU uy
THEORY OF CONSUMER BEHAVOUR: MARGINAL OIILY AND
INDIFFERENCE CURVE ANALYSIS
37
 CAtueall <rpo
Py is the
price of
Y), will indicate the marginal For simplicity, we assume
consuner
that a

utility per rupee spent on Y. the purchase of two

to spend 40
on
wants of which are
and Y the prices
Suppose, a consumer spends his/her incomne Commodities X
3.4 Table shows the
on the R10 respectively. Y
purchase of only two commodities X and 5and
utilities of
these two goods X and
Y. To understand
why a consumer maximises marginal
Schedule
for X and Y
his/her total utility when the marginal utility of the Table 3.4 Utility
last rupee spent on each good is equal, consider
MUy Muy MUx MUy
Units Py
a consumer who receives greater marginal utility Px
from a rupee spent on X than from a rupee
4) (5)
spent on Y. Imagine that the last rupee spent (2) (3)
() 80/1 10
on X
yields utility equal to 5 units whereas 50
70
the last rupee spent on Y gives him 3 units of 45
60
utility. In this case, total utility can be increased 40
Y to 50
by switching one rupee from commodity 35,
between
Commodity X and gaining the difference 5
30 40
i.e, by
the utility of last rupee spent on each, 30
will rise, 25
2 units (5 3 2). Thus, total utility continue utility of
The utility-maximising c o n s u m e r
will
(2) and (3) give marginal
Columns the ratíos of
from Y to X as (4) and (5) give
to switch his/her expenditure X and Y.
Columns
commodities,
on X brings
him/her
to price of the two
long a s o n e rupee spent Y. But this marginal utility spent on the
on of a rupee
utility than a rupee spent marginal utility
more
quantity of i.e., Observe in the
reduces the two
commodities.

of expenditure purchase of
transter
the law of diminishing spent on
and, given table that marginal
utility per rupee
Y Consumed of because
marginal utility
occurs
which
raises the diminishes,
marginal utility, consumed of each good diminishes
quantity
time the of each good
Y. At the same
law of marginal utility
following the rupee will
be quite
X increases and thereby, utility The marginal utility per
utility, the marginal the c o n s u m e r to solve the
diminishing marginal useful in helping
of X falls. the amounts of each good that
of expenditure problem of selecting clear that
of reallocation
From the table it is
This process maximises his utility.
of marginal can be
lead to equalisation i.e., Ox-MOy
will ultimately each of the two the proportionality rule,
spent on Px P
utility of last rupee will
the 3 units of X
consumer
At this point, such as
Commodities. reallocation of fulfilled at many points,
units of X and 2 units of Y
further
not gain anything by
a
to commodity
X. and 1 unit of Y, or 4
from commodity Y units of Y, 6 units of X and
expenditure the law of 5 units of X and 3
of above explanation,
Inthe light stated thus:
4 units of Y.
can also be these different
utility
equi-marginal
his money income In order to purchase
The consumer will spend combinations of X and Y, the
c o n s u m e r will

in such a way that marginal

on different goods be required to incur
different amounts of
is proportional to its
utility of each good will be in expenditure as indicated,
in Column (3) of
the consumer
price-In other words, Table 3.5.
X and Y, when
equilibrium while purchasing spend R40
Remember, the consumer has to
MUx Uy MU per unit of money on the purchase of X and Y. If he purchases
combination (i), he/she will be able to spend
P Py
R25 only. If he purchases combinations (ii) and
Let us illustrate the law of equi-marginal (iv), he/she is required to spend 55 and
numerical example.
utility by taking a respectively, which are out of his reach, given

FRANK IsC ECONOMICS-XIl

38
 2aject
Table 3.5
Expenditure on Purchase of X 2.Conisumers are, in many cases,
governed
and Y Dherefore, their
by thabitS and customs. purchase of
Combinations Total Expenditure decisions with regard to
0) 3 units of are dictated more
X 25(35+1 10 d1fferentcommodities
than by
1 unit of -15 10 -25) by these considerations rather
Y economicconsiderations
A units of X 3. Many consumers are ignorant, and,
740 (4 5+2 10
therefore, they may-not be able to arrive
2 units of Y 20+ 20-40)
-

at cquilibrium position due to their

(ii) 5 units of X
755(5 5+3x 10 ignorance
3 units of Y 4. Another limitation of the law is that in case
(iv) 6 units of X
-25+30-55)/ ofexpensive and indívisible commodities
such and It is
refrigerators, etc.
70(65+4 10 as cars

hot possible to equate marginal utility of

4 units of Y -30 + 40 70)
money spent on them. In fact, ít is absurd
to talk of marginal utility of a rupee spent
his/her budget. It is
only when he/she
combination (ii) that he/she will be ablepurchases
to incur
on the purchase of a car or a refrigerator.
an
expenditure of
R40, Thus, the consumer will
be in equilibrium
when he/she buys 4 units of 3.2INDIFFERENCE cURVE ANALYSIS/
X and 2 units of
Y and thereby spends a total ORDINAL UTILITYANALYSIS
Sum of 740. Modern demand theory uses an analytical
How much total utility will the consumer approach called Indifference curve analysis to
obtain from his/her income of 40? We can explain how the household makes decision
calculate the total utility as the sum of the with regard to his/her economíc choices and
marginal utilities from the purchases of each purchases, The indífference curve approach was
originally developed by an Italian economist
product. Referring to the marginal utilities in the
table, we can see that the marginal utilities for the Pareto, who was the first economist to draw
first four uníts of X are: 50 + 45 + 40 + 35 170, the indifference curves, and subsequently in the
The marginal utilities for the first two units of Y fully developed form by the British economists,
are: 80 + 70- 150. When 4 units of X and 2
units JR Hicks and RGD Allen. Indifference curve
of Y are purchased, the consumer will obtain analysis has abandoned the concept of cardinal
320 (170+ 150 320) units of utility. No other utility and has adopted the concept of ordinal
combination of X and Y can give as much utility utility. Cardinal utility means that the utility that
a consumer gets from a unit of a commodity
when income is R40.
can be measured in absolute amount. Utility
Limitations ofLaw of Equi-Marginal Utility derived from a commodity can be measured
is important just as we can measure height, weight, length
equi-marginal utility
an
Phe law of
consumer how to spend and temperature, etc. Marginal utílity approach
principle, It guides of explained above assumes that utility is
o n the purchase
his/her limited income
to maximise hiís/her measurable in absolute terms., Indifference curve
different commodities so as analysis is based on the idea of ordinal utility.
however, we may find it
satisfaction. In practice,
the following the consumer is
The ordinal utility implies that
difficult to apply this principle for
capable of simplycomparing the utility derived
reasons to know from different goods or different units of the
the consumers

1. It is difficult for dífferent same good, In other words, ordinal utility does
utilities from
the marginal not require that the consumer should be in a
cannot be
C o m m o d i t i e s because
utility
position to measure (in quantitative terms) the
measured,

BEHAVIOUR: MARGINAL UTILITY AND INDIFFERENCE CURVE ANALYSIS 39

THEORY OF CONSUMER
ulaty from different him same
ot the same good or goods or different units sense that these combinations give
preference
different satisfaction). It shows the
consumer's

goods. All that is necessary forcombinations ot

for goods in qualitative
terms. The scale of
to know is which goods or which the consumer require the consumer to
of goods give him the same combinations preference does
not
of utility (in quantitative
exact amount
goods or
utility, and whicn know the
alternative combinations.
combinations of goods give more or terms) derived from the
to know
less utility- how much more or less, that 1s
consumer
for the
All that is necessary
not needed. combinations
him
give
same utility, and
is which
him more o r less utility
c o m b i n a t i o n s give
which
JR Hicks (1904-89)
3.2.1 Indifference Curve
JR Hicks was a British
economist and one of the a single
indifference curve,
We start by developing household somne
most important and influential imaginary
To do this, we give our
and food-
economists of the 20th century goods-say clothing
quantities of
two
He was part of a generation satisfaction. This is shown
which give him equal
of economists who contributed indifference
schedule as
illustrated in
significantly to the development by an
schedule refers to
Table 3.6. An indifference
of various fields of economics. Among his various schedule that
shows various combinations
contributions in economics, the most
familiar a
which give equal amount of
were in the theory of consumer
demand. He is oftwo goodsto the consumer. Since each of
now-standard satisfaction equal
credited for having introduced the combinations gives
the h o u s e h o l d
effect and these
distinction between substitution household is
indifferent among
His other satisfaction, the
income effect in the demand theory.
field of economics
were them.
contributions in the
of wages, general Indifference Schedule
ordinal utility analysis, theory IS-LM
Table 3.6
Hicks developed the
equilibrium theory. Combination Food Clothing Marginal
an interaction of Keynesian
model which gave Rate of
and is regarded as the (units) (units)
macroeconomics
view of
of modern
macroeconomics. Substitution
standard model
awarded Nobel Memorial
Prize in
(3) (4)
Hicks was
for his (1) (2)
Sciences jointly) in 1972 10
Economics A
contribution to general equilibrium 1:3
pioneering B 2
theory and welfare theory. 1:2
c 3
4 1:1
D
analysis is based on the
The indiference curve

of the household
given scale of preference on the part The above schedule shows that
idea of a combinations satisfaction from all the four
between different gets equal
the consumer as of food and
amount of two goods (say combinations, namely A, B, C and D,
of two goods. An consumed has 1 unit of
clothing and food) by a household clothing. At combination 'A, he/she
of these goods. Table 3.6 food and 10 units of clothing; at combination 'B
is called a combination
shows a few combinations (or
bundles) of food he/she has 2 units of food and 7 units of clothing
to the household. A scale and so on. In order to have one more unit ot
and clothing available food, he/she has to sacrifice some amount of the
as between different
of preference ofa
consumer

combinations of two goods implies

that as
clothing in such a way that there is no change
can definitely in the level of his/her satisfaction from each ot
between these combinations he/she
he/she prefers to others these combinations.
say which combinations satisfaction and among If we show these combinations diagram
as they give him/her
more

is indifferent (in the matically, we get an indifference curve. In other

which combinations he/she

FRANK ISC ECONOMICS-XIl

40
 c o n s u m e r

words, indifference 3.6. The

schedule in Table
curve is indifference

diagrammatic
combinations
a
presentation
Table
of
indifference schedule. Based may similarly
make many
other
one o r
both
on 3.6, an with less of
in Fig. 3. In this
indifference curve is shown of food and clothing c o m b i n a t i o n yields

is shown on diagram, quantity of food the goods such that each

less than the
OX-axis and that satisfaction but
OY-axis. Combinations A, B, C of clothing on the s a m e level of
by the indifference
and D are indicated
from Table 3.6. If we take
the locus of
plotted level of satisfaction
will lie below
the
all these curve IC in Fig. 3.
This curve

points, we
get a curve known lower level of
satisfaction.
curve. An
as indifference Curve IC showing
1ndifference curve shows_various may make many
other

combinations of two
commodities which give Similarly, the
consumer

of one or both the

equal amount of satisfaction to the consumer.
combinations with more

the same
t 1s the locus of goods each combination giving
various
points, each
representing a different combination point satisfaction, but greater than
the satisfaction
of two goods, will lie above
which yield the level of satisfaction to the
same given by IC in Fig. 3. This curve
these
consumer so that
he/she is indifferent between the indifference curve IC in Fig. 3. When
of
these combinations. Since
various combinations different indifference curves or a family
on an indifference curve indifference curves are shown in a diagram, it is
the
yield equal satisfaction,
consumer gives equal importance to all these
combinations. In other words,
he/she is indifferent
among all these combinations. uO wM ptrO
Thus, different
points A, B, C and D on indifference curve IC
show those combinations of food and
which give equal amount of satisfaction
clothing
to the
consumer. An indifference curve is also known as
ISO-Utility Curve. n d i p e

10 IC2
-1C
J Units of Food
gIndifereoce Map
D called indifferencé map. Thus,indiference map
IC
isa group or set of indifference curves each one
of which represents a given level of satisfaction.
Fig. 4 shows such an indifference map consisting
of various indifference curve
IC, IC IC,
Units of Food and IC. Each indifference curve
represents
Fig. 3 Indifference Curve different level of satisfaction. All the on apoints
particular indifterence curve indicate alternative
3.2.2. Indifference Map combinations of food and clothing that
So far we have constructed only a single
give the
household equal amount of satisfaction. The
indifference curve, which gives a particular further the curve from the
origin, the higher
level of satisfaction to the consumer. For each is the level of satisfaction it
represents. For
level of satisfaction we can draw a particular example, IC, is a higher indifference curve than
indifference curve. We have drawn a singie I C which means that all points on 1C, vield a
3 the basis of
indifference curve IC in Fig on an
higher level of satisfaction than the
points on IC
THEORY OF CONSUMER BEHAVIOUR: MARG|NAL UTILITY AND INDIFFERENCE CURVE ANALYSIS
41
 3.2.3 Marginal
Rate of
Substitution to C. The implication of the assumption
the tastes
of choice is that
Marginal rate of of transitivity
at which the substitution (MRS) is the rate are
consistent.
of the consumer

consumer is willing to substitute 5. Diminishing

Marginal Rate of
One good for another without Substitution: Indifference curve analysic
of satisfaction. Marginal ratechanging
the level
ot diminishine
ot Y for X (MRS) is defined
of substitution is based on the assumption
substitution. This meane
as the amount marginal rate of
of Y the consumer
is that as the consumer
substitutes mor
one
to willing give up to 8et
(say X) fo
additional unit of X so that the same level and more of one commodity
of satisfaction is maintained. another commodity (say Y), he/she wi
Marginal rate ot
units oftho
substitution of clothing for food is illustrated beprepared to give up lesser
unit of tho
in Col. 4 of Table 3.6. For example, when later (Y) for each additional
he consumer moves from combination "A to former(X)
combination 'B, he/she is willing to give up 3 lndifference Curves
3.2.5 Properties of
units of clothing for 1 unit of food, i.e., MRS Of
of indifference
clothing for food is 1:3. There are four main properties
which are as follows:
In the same way, when we substitute X for curves,
Curve Slopes Downward
The 1. An Indifference
marginal rate of
Y, we express it as MRS An indifference
substitution X for Y is defined as the amount or aDI from Left to the Right:
from left to
one o c u r v e slopes downward
t h e consumer is willing to give up to get
additional unit of Y while maintaining the same 0 right, i.e., it has a negative slope. This
oproperty is based on the
assumption that
level of satisfaction. Prop
if a consumer consumes more of one
Curve he/she must consume
3.2.4 Assumptions of Indifference commodity (food),
Analysis C
lessquantity of the other (clothing), then
only he/she the same
will have level of
Indifference curve analysis makes the following
satisfaction from different combinations of
assumptionsi The is assumed to
the two commodities. For example, Fig.3
1. Rationality: consumer
illustrates that when the consumers move
be rational. He/She aims at attaining the
so as
from combination 'A to combination B on
highest possible indifference curve the given indifference curve (IC), he/she
tomaximise his total satisfaction. consumes 1 more unit of food, but 3 units
2. Ordinal Utility: Indifference curve
less of clothing so as to get the same level
is only
analysis assumes that the utility of satisfaction from both the combinations
than being
ordinally measurable rather This necessitates that an indifference curve
terms. Ordinal
measured in quantitative
means 'ranking or 'ordering'.
must be negatively sloped. However, if
the amount of food is increased and the
3. Nonsatiety: It is also assumed that the amount of clothing remains the same, the
consumer is not oversupplied with goods
consumer will prefer new combination
That is, he/she
y consumed by him/her. to the original one because the new
not reached the point of saturation
yhas combination will give him more utiit
Su
in case of any one commodity. Therefore,
a consumer will always prefer a larger Therefore, these two combinationswill na
amount over a smaller amount of a lie on the same indifference curve.
commodity. 2. An Indifference Curve is Convex tothe
Transitivity of Choice: Consumer's choices Origin: Another property of indifferenat
Pore are assumed to be transitive. Transitivity
of choice means that if consumer prefers
Curve is that it is convex to the orn8
Convexity of the curve implies that
A to B and B to C, he/she must prefer A bows inward to the origin. In otn

42 FRANK ISC ECONOMICS

 words, the gives a

curve slope of the

indifference of another
indifference c u r v e

decreases than the lower

as we
move down higher level of satisfaction
indifference curve. This
the
indifference c u r v e represents
assumption of
follows from the one.Higher
substitution.diminishing
more
combina tions which yield
of
The marginal rate those
combinations on the
analysis is based on indifference
the assumption
curve satisfaction than the
lower indifference curve. A combination
dtminishing
This marginal rateof substitution.
of
on a higher indifference curve will give
assumption implies that lesser is more satisfaction than a combination
on a
the amount of one
commodity
by a household, the consumed lowerindifference curve since the
former

household will be to lesser willing the combination will have more amount of
give up a unit of
that commodity to obtain
one commodity or the other or more

uni of the other an additional amount of both the commodities.

observe that thecommodity. We normally Consider the indifference curves IC

to sacriice a
consumer's willingness and IC, in Fig. 5. Combination 'B lies
the stock of the commodity
is lower when on the higher indifference curve IC, than
is less. He/She commodity
with him/her combination A which lies on the lower
a unit of the
gives more significance to indifference curve IC. Combination B
which is
commodity the amount of gives more satisfaction to the consumer
down the
decreasing. Thus, as we move than combination 'A because he/she gets
Table 3.6 and indifferenoce curve
IC in Fig. 3
through combinations A to more of both goods -MM more of X
D', the household is 80od and NN, more of Ygood.
consuming less and
less quantity of loth and more Two Indifference Curves Never Intersect
and more
Each Other: An important property of
quantity of food. In accordance with the
indifference is that they may
curves
assumption of diminishing marginal rate
lie close to each other, but they never
of substitution, the rate at which the intersect. This follows from the fact
consumer is willing to give up further that each indifference
clothing to get more food diminishes.
curve
represents
When the household moves from A different level of satisfaction. Therefore
to twoindifference curves do not intersect or
B for example, the household is prepared
to give up 3 unis of clothing for 1 unit
ecl
of food, but when he/she moves from B SoakR e
toC he/she is willing to give up only 2
units of lothing for 1 unit of food.
The slope of the indifference curve shows - IC2
the marginal rate of substitution because it
indicates the rate at which the consumer
- IC
is willing to substitute one good for the
other. The assumption of diminishing
marginal rate of substitution implies that
the slope of the indifference curve must M
Quantity of X
be decreasing from left to right. In other

words, an indifference curve must be Fig. 5

convex to the origin. touch each other. If the two indiference
3. Higher Indifference Curves Yield curves
intersect each other. this would
Satisfaction: An indifference imply that a combination ot twe goeds
Higher
curve which lies above and to the right corresponding to the point.of intersection

EORY OF cONSUMER BEHAVIOUR: MARGINAL UTILITY AND INDIFFERENCE CURVE ANALYSIS 43

 would give two different levels of
satisfaction, which is absurd.
3.2.6 Budget Line
Indifference curves show the tastes and 23
preferences of the consumer. In order to find 32
out what quantities of the two goods will be
purchased by the household, we mustalso know
hoy much expenditure the household wants to 6 8 10
incur on these two commodities and what are the
Units of Food
prices of the two commodities. This information,
Budget Line
i.e., expenditure on two commodities and their Fig. 6
prices, enables us to draw a budget line. While represent the maximum
These combinations
indifference curves tell us what choices the amounts that can be purchased with an
household would like to make; the budget line the given prices of food
expenditure of R200 at
tells us what the household can do. We illustrate these combinations
and clothing. can
Let us draw a budget line and explain it by 6. The units of clothing are
graphically in Fig.
taking an example. shown on the vertical axis and units of food are
Suppose that the consumer has <200 to spend shown on the horizontal axis, and then we plot
on food and clothing and suppose that the price various combinations of clothing and food from
of food is R20 per unit and price of clothing the Table 3.7. These points then are connected
is R40 per unit. How much of food and clothing with a line. These points trace a downward-
can the consumer buy, given the consumer's
sloping line, starting from the upper left with
expenditure and the prices of two commodities? zero units of food and 5 units of clothing and
f the consumer spends entire amount of R200 on ending on the right with 10 units of food and
clothing, then 5 units of clothing and no units of zero unit of clothing. All other combinations of
food can be purchased. If the consumer buys 4 clothing and food shown in Table 3.7, such as 4
units of clothing at 740 per unit then R160 will be units of clothing and 2 units of food, are shown
Table 3.7 Combinations of Clothing on this line. This line is called the "budget line'
o/and Food or price line'. It is called budget line becauseit
shows various combinations of clothing and food
Units of Units Expenditure which can be purchased with a budget of 200
Clothing of Food at given prices of the two commodities. Thus, a
5 0 5 x 40 + 0 x 20 = R200

4 2 4 x 40+2 x 20 R200 budgetline shows various combinations of two

commodities which can be purchased with a given
3 4 3 x 40 + 4 x 20 = R200
budget at given prices of the two commodities
2 6 2 40+6 x 20 7200
A budget line is a
negatively sloping line
8 1 x 40 + 8 x 20 R200
because if the consumer wants to purchase
0 10 0x 40+ 10 x 20 7200 amount of
more one
commodity, he/she has to
spent on clothing and remaining 40 can be spent sacrifice some amount of the other commodity
in buying 2 units of food. On the other extreme, Thus, if he/she wants to purchase 1 more unit ot
ifthe consumer spends entire amount of R200 clothing, he/she has to give up 2 units of food.
on food, then 10 units of food and no units of The slope of the budget line depends on the
clothing can be bought. These and several other prices of two commodities. In particular, the slope o
combinations of amounts of clothing and food
in Table 3.7.
the budget line is equal to P where P is the prie
are shown

44 FRANK IsC ECONOMICS-Xll

 Stoye

of the
(food
commodity
in our shown on the horizontal axis necessary
but not
This
example) and is P. the price of MRSxy
a

commodity shown on the vertical axis sufficient condition for equilibrium.

inour example). (clothing should be convex
Thus, the main ii) The indifference curve
1. It is a
properties of budget line are: to the origin.
negatively sloped line. The consumer cannot purchase any
n e SIope of the budget line is eaual tocombination, which lies to the rignt oO
the price ratio of it is out
3. It is a
two commodities. line KL such as combination 'D', because
straight line as we assume given of his/her reach with the given income and given

prices of the two other

prices of the two commodities. On the
commodities while
drawing it, hand, any budget line,
combination inside the
A budget line is drawn on such as combination A, is within his/her reach.
the
that: (a) Money income of assumption But any such combination will give him/her less
the consumer is fixed, utility than any combination on the budget line
and (b) The prices of the two commodities are because it lies on a lower indifference curve.
given.
Moreover, the will not be able to
consumer

3.2.7onsumer's Equilibrium through spend his/her entire income by choosing such a

combination. Thus, the combination of food and
Indifference Curve Approach
clothing with the highest utility must be on the
Now, we can
explain consumer's equilibrium budget line.
with the
help of indifference As is clear from the Fig. 7, the highest
approach. curve
A consumer attains his/her equilibrium when indifference curve with a point on the budget
he/shemaximises his/her total utility,
given line is the one that just touches, i.e., is tangent
his/her income and prices of the two commodities. to the budget line. This occurs at point T. The
We combine the indifference curves and the tangency point is the highest level of utility or
the highest indifference curve that the consumer
budget line on the same diagram to illustrate
consumer's equilibrium. As in the utilityanalysis,
indifference curve analysis also assumes that the
Cpr
consumer trie maximise his utility. Given the Consumer's

of money which the c o n s u m e r wants to

equilibrium k
amount
t h e
B
spend on two commodities and given the prices to

of the two commodities, we can draw abudget M IC3

line. While the budget line shows the various C2
the can afford to
Combinations which consumer
C
buy with prices
hís/her given budget and given shows
the indifference map X
of the two goods, Units of Food
the consumer's scale of preferences between Fig. 7 Consumer's Equilibrium

various combinations goods. Utility can achieve subject to the budget constraint. It
of the two

constraint i sthe combination of OM of clothing and ON

maximisation subject to the budget
the highest possible indifference of food that the consumer purchases. Compare
means getting to
Curve without going above the
budget line. equilibrium point T with the other points. Point
Indifference c u r v e approach
explains A is not the best because it is inside the budget
with the use of line. Point B is not the best point because it lies
consumer's equilibrium
and the budget on a lower indifference curve 1C, and gives a
Consumer's
indifference map
be fulfilled for the lower utility than point T, which is on a higher
conditions need to
line, Two indifference curve IC,, Point D is preferred too
Consumer to be in equilibrium.

BEHAVIOUR: MARGINAL UTILITY AND INDIFFERENCE CURVE ANALYSIS 45

THEORY OF CONSUMER
point T, as it lies on a
higher indifference curve of goods, will attain his/her equilibrium when
IC but it is not feasible because it is outside marginal rate of substitution between two goods
the budget line. is equal to price ratio of two commodities
At the point of tangency T, the Indifference curve IC2 is the highest possible
slopes of the
price line and the indifference curve IC2 are indifference curve which the consumer can attain
under the given situation.
equal. We know that the slope of indifference
curve shows the marginal rate of substitution In conclusion, it is important to note that there
(MRS) between two while the slope of the
goods, are some similarities between the two approaches
budget line shows the ratio between the prices to consumer's analysis. However, the indifference
of two goods. We can, therefore, express the urve technique is superior to marginal utility
condition of consumer's equilibrium in another technique. Indifference curves analysis makes
way, 1.e., lesser assumptions as well as less restrictive
Price Ratio of two goods assumptions. At the same time, it is able to
(i) MRS
=

provide more general explanation of the effectot

COrMRSxY= Px change in price of a commodity on its demand.
Py It is widely believed that the indifterence
now

(ii) At the same time, MRS,y should be curve analysis marks an improvement upon
tne
decreasing at the equilibrium, i.e., the IC marginal utility analysis because it assumes 'less
curve should be convex to the origin. and explains 'more', whereas the marginal utility
Thus, a utility-maximising consumer, given analysis assumes 'more' and explains 'less.
his/her income, taste and preferences and prices

SUMMARY