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Revision: Microeconomic Theory >> Theory of Consumer Behaviour: Marginal Utility and Indifference Curve Analysis Economics ISC (Commerce) Class 12 CISCE

Definitions [11]

Definition: Utility

“Utility is the ability of a good to satisfy a want.” (Prof. Hibdon)
“Utility may be the quality which makes a thing desirable.” (J.S. Nicholson)

Define marginal utility.

Marginal utility refers to the additional utility derived from the consumption of an additional unit of a commodity.

Definition: Marginal Utility

"The marginal utility which results from a unit increase in consumption." -Prof. Boulding
"Marginal utility is an addition made to total utility by consuming one more unit of a commodity." -Prof. Chapman

Define the following concept:

Total utility

Total utility refers to the total satisfaction derived by the consumer from the consumption of a specific quantity of a commodity.

Definition: Total Utility

According to Prof. Leftwitch, "Total utility refers to the entire amount of satisfaction obtained from consuming various quantities of a commodity."

Definitions: Law of Diminishing Marginal Utility

According to Chapman: "The more we have of a thing, the less we want additional increments of it or the more we want not to have additional increments of it."
According to Anatol Murad, "The law states that other things being equal, the marginal utility of a stock decreases as the quantity of the stock increases."
According to Samuelson, "As the amount consumed of a good increases, the marginal utility of the good leads to a decrease."

Definition: Consumer's Equilibrium

"A consumer is in equilibrium when he regards his actual behaviour as the best possible under the circumstances and feels no urge to change his behaviour as long as circumstances remain unchanged." – Scitovosky

Definition: Indifference Curve Analysis

According to Hicks, "It is the locus of the points representing parts of quantities between which the individual is indifferent and so it is termed as an indifference curve."
According to Meyres, "An indifference curve may be defined as a schedule of various combinations of goods which will be equally satisfactory to the consumer concerned."
According to Ferguson, "An indifference curve is a combination of goods, each of which yields the same level of total utility for which the consumer is indifferent." According to Leftwich, "A single indifference curve shows the different combinations of X and Y that yield equal satisfaction to the consumer."

Definition: Marginal Rate of Substitution (MRS)

Prof. A. Koutsoyiannis defined "the marginal rate of substitution of Y for X (MRSyx) as the number of units of commodity Y that must be given up in exchange for an extra unit of commodity X so that the consumer maintains the same level of satisfaction."
In the words of Prof. Bilas, "the marginal rate of substitution of Y for X (MRSyx) is defined as the amount of Y the consumer is just willing to give up to get one additional unit of X and maintain the same level of satisfaction."

Definition: Budget Line

Price Line/Budget Line shows all the combinations of two goods a consumer can purchase, given their total money income and market prices.
Ferguson: “The price line shows the combinations of goods that can be purchased if the entire money income is spent.”
Prof. Hibdon: “The budget line shows all the different combinations of the two commodities that a consumer can purchase, given his money income and the price of the two commodities.”

Definition: Maximum Satisfaction

A consumer’s equilibrium is a situation where a consumer obtains the maximum satisfaction possible from two goods with a given income and prices.

Formulae [5]

Formula: Total Utlity

Total Utility:
\[TU_n=MU_1+MU_2+...+MU_n\]

Formula: Marginal Utility When More Than One Unit Is Added

When more than one unit is added:
\[MU=\frac{\Delta TU}{\Delta Q}\]

Formula: Marginal Utility

Marginal Utility:
\[MU_n=TU_n-TU_{n-1}\]

Key Formula and Explanation

\[MRS_{xy}=\frac{\Delta Y}{\Delta X}=\frac{MU_X}{MU_Y}\]

Where:

= units of good Y given up
= units of good X gained
= marginal utility of X
= marginal utility of Y

The slope of the indifference curve (MRS) equals the ratio of the two goods' marginal utilities.
If MU of X is high, you'll give up more of Y for an extra X (high MRS).

Formula: Budget Line

Total Spending = (Food Units × Price of Food) (Clothing Units × Price of Clothing) = Budget

M = P_f× Q_f+ P_c× Q_c

In this example:

Key Points

Key Points: Utility

Utility means want-satisfying power.
It is subjective, varies with time/place, and forms the base of demand.
Utility differs from usefulness, pleasure, and satisfaction—each has a unique meaning in economics.
Common types include form, place, time, service, knowledge, and possession utility.

Key Points: Total Utility and Marginal Utility

Total utility = total happiness from all units.
Marginal utility = extra happiness from one more unit.
Marginal utility usually decreases as we consume more.
When marginal utility becomes zero, total utility is at its maximum.
If you keep consuming, marginal utility can turn negative (“too much of a good thing!”).

Key Points: Law of Diminishing Marginal Utility

Given by French engineer Gossen
Also called Gossen’s First Law
First given by H.H. Gossen, systematically explained by Alfred Marshall
As consumption increases, marginal utility decreases
Other things remaining constant
Each extra unit gives less satisfaction.
Utility may become zero or even negative if overconsumed.
Law helps explain real consumer and economic behaviour.

Key Points: Law of Equi-Marginal Utility

The law of equi‑marginal utility explains how a rational consumer allocates limited income among many goods to get maximum satisfaction.

It states that a consumer reaches maximum satisfaction when the marginal utility per unit of money is equal for all goods, i.e.

This is an extension of the law of diminishing marginal utility to many commodities and is also called Gossen’s Second Law or the law of maximum satisfaction.