ch2.2

• The consumer attains equilibrium at the point where the budget line is tangent to the indifference curve and MU x / P x =MU y /P y = MU z /P z.
• Theory of Demand and Supply Unit 2: Theory of Consumer Behaviour focuses on explaining the meaning of utility, how consumers try to maximize their satisfaction by spending on different goods, the law of diminishing marginal utility with examples, consumer surplus with examples, indifference curve and the price line, and how these help in explaining consumer equilibrium.
• In economics, the term 'want' refers to a wish, desire or motive to own or/and use goods and services that give satisfaction.
• Wants may arise due to physical, psychological or social factors.
• Since the resources are limited, we need to make a choice between the urgent wants and the not so urgent wants.
• All wants of human beings exhibit some characteristic features.
• Wants are unlimited in number.
• All wants cannot be satisfied.
• Wants differ in intensity.
• Some wants are urgent, others are less intensely felt.
• Each want is satiable.
• Wants are competitive because resources are scarce in relation to wants.
• Wants are complementary because some wants can be satisfied only by using more than one good or group of goods.
• A particular want may be satisfied in alternative ways.
• Wants are subjective and relative because they vary with time, place, and person.
• Consumers maximize their well-being subject to constraints: Consumers maximize their well-being subject to constraints, with the most important constraint being the budget constraint.
• A higher indifference curve represents a higher level of satisfaction than the lower indifference curve: A higher indifference curve shows a higher level of satisfaction than a lower one.
• The most important constraint all of us face in deciding what to consume is the budget constraint: Consumers almost always have limited income, which constrains how much they can consume.
• Consumers use up their entire nominal money income to purchase the commodities: Consumers use up their entire nominal money income to purchase the commodities.
• A budget line shows all those combinations of two goods which the consumer can buy spending his given money income on the two goods at their given prices.
• A consumer’s choices are limited by the budget available to him: A consumer’s consumption possibilities are the set of all consumption bundles that can be consumed given the consumer’s income and prevailing prices.
• Indifference curves can never intersect each other: No two indifference curves will intersect each other although it is not necessary that they are parallel to each other.
• In case of intersection the relationship becomes logically absurd because it would show that higher and lower levels are equal, which is not possible.
• An indifference curve will not touch either axes: An indifference curve will not touch the X axis or Y axis.
• Some wants recur again whereas others do not occur again and again.
• Wants may become habits and customs.
• Wants are affected by income, taste, fashion, advertisements and social norms and customs.
• Wants arise from multiple causes such as physical and psychological instincts, social obligations and individual’s economic and social status.
• In Economics, wants are classified into three categories, viz., necessaries, comforts and luxuries.
• The consumer could buy any bundle that cost less than Rs 100.
• While doing this, the consumer will pass through a variety of indifference curves.
• The consumer has a given indifference map which shows his scale of preferences for various combinations of two goods X and Y.
• The consumer can arrive this choice moving down his budget line starting from point R.
• The consumer’s optimal choice should satisfy two criteria: it will be a point on his budget line; and it will lie on the highest indifference curve possible.
• A consumer is in equilibrium when he is deriving maximum possible satisfaction from the goods and therefore is in no position to rearrange his purchases of goods.
• The consumer can still reach a higher level of satisfaction remaining within his budget constraints i.e., he can afford to have combination Q lying on IC 3 because it lies on his budget line.
• The slope of the budget line is determined by the relative prices of the two goods and is equal to the 'Price Ratio' of two goods.
• All combinations within the reach of the consumer, assuming he spends all his money income, will lie on the budget line.
• At the tangency point Q, the slopes of the price line PL and the indifference curve IC 3 are equal.
• The budget line will shift when there is a change in the prices of one or both products with the nominal income of the buyer (budget) remaining the same.