Theory of Consumer Behaviour
Class 12 · Economics
5 ideas in Class 12 Economics, explained in plain words, with games and quizzes to practise.
Total Utility, Marginal Utility and Diminishing Returns
Part of: Joy and Its Trades
Utility is subjective want-satisfying power, ranked ordinally in real life. Total utility sums the marginal utilities of each unit. In the worked table TU runs 15, 27, 36, 42, 45, 44, so MU runs 15, 12, 9, 6, 3 and minus 1. MU is zero at the fifth unit where TU peaks, then turns negative as TU falls.
Why it matters. Demand curves slope down because extra units please less. Learners who can read a TU table understand why they pay less for the sixth unit than the first.
Formulas
- MU of nth unit = TU of n units - TU of n-1 units
- TU of n units = MU1 + MU2 + ... + MUn
- MU falls: 15, 12, 9, 6, 3, -1 in the worked table
Key words
- Utility
- : Want-satisfying power of a commodity.
- Total utility
- : Total satisfaction from a given quantity.
- Marginal utility
- : Extra satisfaction from one more unit.
- Cardinal utility
- : Valuing utility in numbers.
- Ordinal utility
- : Ranking bundles without numbering utility.
- Law of diminishing marginal utility
- : MU falls as consumption of a good rises.
- Point of satiety
- : The unit where MU turns zero and TU peaks.
- Diminishing returns to consumption
- : Less MU from each extra unit.
Try it in two minutes
- Ask the child how the second sweet compares with the first.
- Ask what the sixth sweet would feel like.
- Explain that falling extra joy is the law at work.
Try at home. Build your own TU table for six glasses of water and find where MU turns zero.
Indifference Curves and the Rate of Substitution
Part of: Joy and Its Trades
An indifference curve joins bundles of equal utility and slopes down because more bananas need fewer mangoes. In the worked table bundles run (1,18), (2,14), (3,11), (4,9), so MRS is 4, then 3, then 2: diminishing. Higher curves are preferred under monotonicity, curves never cross, and perfect substitutes give a straight line.
Why it matters. Every choice between two goods is movement along or between these curves. Learners who can compute MRS see the exact trade price of joy.
Formulas
- MRS = mangoes given up / bananas gained
- MRS falls: 4, 3, 2 in the worked table
- Higher curve = more of at least one good = preferred
Key words
- Indifference curve
- : Curve joining bundles of equal satisfaction.
- Indifference map
- : Family of indifference curves for all levels.
- Marginal rate of substitution
- : Mangoes forgone per extra banana at same joy.
- Diminishing MRS
- : MRS falls as bananas rise.
- Perfect substitutes
- : Goods usable in place of each other.
- Monotonic preferences
- : Preferring more of a good, never less.
- Convex to the origin
- : Curve bending toward the origin.
- Linear indifference curve
- : Straight-line curve of substitutes.
Try it in two minutes
- Ask the child to swap fruit keeping joy equal.
- Ask how many mangoes each extra banana costs.
- Explain that cheaper trades later bend the curve.
Try at home. Make your own four-bundle table and check whether MRS falls.
The Budget Set and the Budget Line
Part of: Money Limits and Best Picks
With income 30 and prices 6 for bananas and 5 for mangoes, the line joins 5 bananas with 6 mangoes: slope minus 1.2. Bundle (3,2) costs 28 and is affordable; (4,2) costs 34 and is not. Doubled income shifts the line out in parallel; a doubled banana price pivots it inward to an intercept of 2.5.
Why it matters. Every shopping trip is a point in this triangle. Learners who can draw its edge see exactly what a pay rise or a price rise does to their choices.
Formulas
- p1 x bananas + p2 x mangoes <= income
- Horizontal intercept = income / banana price
- Vertical intercept = income / mango price
- Slope = -banana price / mango price
- Income 30, prices 6 and 5: intercepts 5 and 6, slope -1.2
Key words
- Budget set
- : All bundles costing no more than income.
- Budget line
- : Bundles costing exactly the full income.
- Horizontal intercept
- : Most bananas buyable with all income.
- Vertical intercept
- : Most mangoes buyable with all income.
- Price ratio
- : Mangoes forgone per extra banana in the market.
- Parallel outward shift
- : Outward parallel move after income rises.
- Pivot inwards
- : Inward tilt after one price rises.
- Divisible goods
- : Goods buyable in fractions like rice.
Try it in two minutes
- Ask the child what 30 rupees can buy at given prices.
- Ask what changes if money doubles.
- Ask what changes if one price doubles.
Try at home. With 30 rupees and prices 6 and 5, list five affordable mixes.
Best Choice, Demand and Related Goods
Part of: Money Limits and Best Picks
The optimum sits where the budget line touches the highest indifference curve, so MRS equals the price ratio. Cheaper bananas raise demand through substitution toward bananas and income gains. Tea and coffee substitute, tea and sugar complement. Income, related prices and tastes shift the curve; own price merely slides along it. Market demand adds individual picks: with d1 = 14 minus 2p and d2 = 20 minus 2p, market is 34 minus 4p up to price 7, then 20 minus 2p up to 10.
Why it matters. Every shop's sales curve is this logic in action. Learners who can separate slides from shifts and add up buyers can predict sales after any price or pay change.
Key words
- Consumer optimum
- : Touch point of budget line and top reachable curve.
- Tangency condition
- : Willing substitution rate equals market rate.
- Substitution effect
- : Extra demand from swapping toward the cheaper good.
- Income effect
- : Extra demand from greater purchasing power.
- Normal good
- : Demand rising with income.
- Inferior good
- : Demand falling as income rises.
- Complementary goods
- : Goods used together, like tea and sugar.
- Substitute goods
- : Goods used in place of each other, like tea and coffee.
Try it in two minutes
- Ask the child where the edge kisses the top curve.
- Ask why cheaper bananas get bought more.
- Ask what a pay rise does to coarse grain demand.
Try at home. Pick two substitute goods at home and predict demand when one turns costlier.
Elasticity of Demand
Part of: How Buyers React
Elasticity is the percentage demand change divided by the percentage price change, read in absolute value. From 8 to 10 with 30 to 24, demand falls 20 per cent against a 25 per cent price rise: 0.8, inelastic. On q = 60 minus 3p elasticity is 0.33 at price 5, 1 at 10 and 3 at 15. Elastic goods lose spending on price rises; inelastic goods gain; unitary goods hold steady.
Why it matters. Every pricing decision is an elasticity bet. Learners who can compute the reaction know when a price rise will fatten or starve the shop's earnings.
Formulas
- Elasticity = (change in Q / Q) / (change in P / P)
- q = 60 - 3p: elasticity 0.33 at price 5, 1 at 10, 3 at 15
- Price up 10 per cent, quantity down 8 per cent: spending rises (10120 beats 10000)
Key words
- Price elasticity of demand
- : Percentage demand change over percentage price change.
- Elastic demand
- : Reaction stronger than price: elasticity above one.
- Inelastic demand
- : Reaction weaker than price: elasticity below one.
- Unitary elastic demand
- : Reaction matching price: elasticity of one.
- Perfectly inelastic demand
- : Vertical curve with zero reaction.
- Perfectly elastic demand
- : Flat curve with infinite reaction.
- Unitary elastic curve
- : Curve with equal reaction everywhere.
- Expenditure
- : Price times quantity bought.
Try it in two minutes
- Ask the child which goods ignore price rises.
- Ask why luxuries swing more than salt.
- Show that stiff demand lets earnings rise with price.
Try at home. Pick a shop good, guess its elasticity, and test with a small price change.
What your child will practise
- Best Choice, Demand and Related Goods: Ocean Quick Fire (Quick Fire)
- Elasticity of Demand: Desert Puzzle (Clue Puzzle)
- Indifference Curves and the Rate of Substitution: Candy Quick Fire (Quick Fire)
- The Budget Set and the Budget Line: Ocean Puzzle (Clue Puzzle)
- Total Utility, Marginal Utility and Diminishing Returns: Space Quick Fire (Quick Fire)
- Quiz: Best Choice, Demand and Related Goods (8 questions)
- Quiz: Elasticity of Demand (8 questions)
- Quiz: Indifference Curves and the Rate of Substitution (8 questions)
- Quiz: The Budget Set and the Budget Line (8 questions)