Chapter 2 – Theory of Consumer Behaviour
Q1. Who is a consumer in economics?
A consumer is an individual who buys goods and services to satisfy personal wants using available income.
Q2. What is utility?
Utility is the satisfaction a consumer derives from consuming goods or services.
Q3. What is total utility (TU)?
Total utility is the total satisfaction obtained from consuming all units of a good.
Q4. What is marginal utility (MU)?
Marginal utility is the additional satisfaction gained from consuming one more unit of a good.
Q5. State the law of diminishing marginal utility.
As more units of a good are consumed, marginal utility decreases after a certain point, assuming all other factors remain constant.
Q6. What is consumer equilibrium?
Consumer equilibrium is a situation where a consumer maximises satisfaction given income and prices of goods.
Q7. What is the condition for consumer equilibrium in single commodity case?
MU = Price (MU = P)
Also, MU should decrease after equilibrium to ensure maximum satisfaction.
Q8. What are the assumptions of the law of diminishing marginal utility?
- Rational consumer
- Homogeneous units
- Continuous consumption
- No change in tastes or preferences
Q9. What is the utility approach?
It explains consumer behaviour using utility, i.e., satisfaction from goods — includes cardinal utility and marginal utility analysis.
Q10. What is the ordinal utility approach?
It ranks preferences instead of assigning exact values to satisfaction — based on indifference curve analysis.
Q11. What is an indifference curve?
It is a curve that shows all combinations of two goods giving equal satisfaction to the consumer.
Q12. What are the properties of indifference curves?
- Downward sloping
- Convex to the origin
- Do not intersect
- Higher curve = higher satisfaction
Q13. What is the marginal rate of substitution (MRS)?
MRS is the rate at which a consumer sacrifices one good to gain one more unit of another good, keeping satisfaction constant.
Q14. Why are indifference curves convex?
Because of the diminishing marginal rate of substitution — consumer gives up fewer units of one good for more of the other.
Q15. What is a budget line?
A line showing all possible combinations of two goods a consumer can buy with given income and prices.
Q16. What is the budget set?
All combinations of goods a consumer can afford within income, including those on and below the budget line.
Q17. What causes a shift in the budget line?
Change in income or price of goods — income change shifts the line parallel; price change rotates it.
Q18. What is the slope of a budget line?
It equals the ratio of the prices of two goods (P₁/P₂).
Q19. What is the consumer’s equilibrium in two goods case?
When MRS = Price ratio (P₁/P₂), and the consumer is on the highest indifference curve within the budget.
Q20. What happens if MRS > price ratio?
The consumer values one good more than the market does, so they’ll buy more of that good until equilibrium is restored.
Q21. What is monotonic preference?
A preference where more of a good gives more satisfaction — assumed in indifference curve analysis.
Q22. What is the difference between normal and inferior goods?
Demand for normal goods increases with income; for inferior goods, it decreases as income rises.
Q23. What are substitutes and complements?
Substitutes: Tea and coffee — consumed in place of each other.
Complements: Pen and ink — used together.
Q24. What is the income effect?
Change in quantity demanded due to change in real income caused by price change of a good.
Q25. What is the substitution effect?
Change in quantity demanded when a good becomes cheaper or costlier relative to others, influencing consumer choice.
Q26. What is demand?
The quantity of a good a consumer is willing and able to buy at a given price and time.
Q27. What is the law of demand?
Other things being constant, demand increases when price falls and decreases when price rises — inverse relationship.
Q28. What is the demand curve?
A graphical representation showing the inverse relationship between price and quantity demanded.
Q29. What causes a movement along the demand curve?
Change in the price of the good itself — leads to expansion or contraction of demand.
Q30. What causes a shift in the demand curve?
Change in non-price factors like income, tastes, price of related goods, or expectations — leads to increase or decrease in demand.