03

Consumer Behaviour
 Indifference Curve Analysis

• In view of the limitations of cardinal approach, an alternative technique named

Indifference Curve Analysis was developed to examine the consumer’s behaviour

• Ordinal utility approach explains the behaviour of consumer in terms of his

preferences or rankings for different combinations of two goods

• An indifference curve is derived from an indifference schedule

• Indifference schedule: A list of various combinations of two goods, arranged in

such a way that the consumer is indifferent to the combinations preferring none of
any other
 Indifference Schedule

Combinations X Y
A 1 20
B 2 15
C 3 11
D 4 8
E 5 6
F 6 5
 Indifference curve

➢ An indifference curve is the locus of the combinations of two goods that are
equally satisfactory to a consumer, or to which, the consumer is indifferent

➢ All combinations on the indifference curve are equally satisfactory to the consumer

➢ A diagram showing a set of indifference curves is called indifference map

➢ The combinations of two goods that lie on a higher indifference curve always
preferred to those that lie on a curve below it.
Y Y

I3
I2
I I1
X X
Indifference curve Indifference map
 Properties Indifference curve
Y

➢ Convex to origin

➢ Negatively sloped

➢ Non- intersecting

X
 Y Budget line
➢ Shows all possible combination of goods
that could be purchased with a given
amount of income

➢ Changes in the prices of goods or money

Good Y
income shifts the budget line

X
Good X
 Consumer’s Equilibrium
Y
➢ The rational consumer wants to choose the
highest indifference curve given the budget
constraint

➢ At the point of tangency, the slopes of

Good Y indifference curve and the budget line are equal

I3
I2 ∆𝑌 PX
=
I1 ∆𝑋 Py

X
Good X
Demand Analysis
 Demand
• Willingness and ability to pay for a good during a specific point of time is called
Demand

• Various quantities of a commodities that a consumer would be willing to purchase at

all possible prices in a given market at a given point of time, ceteris paribus is called
Individual Demand

• A list of prices together with the quantities that will be purchased by a consumer is
called a Demand Schedule

• The sum of the individual demand of all the consumers in a market for a given
commodity at a specific point of time is called Market Demand
 Individual demand v/s Market demand
1. Individual demand: It is the demand when the various quantities of a
commodity that a consumer would be willing to purchase at all possible
prices in a given market at a given point in time ceteris paribus

2. Market demand: Horizontal summation of the demand of all the

consumers in a market for a given commodity at a particular point of time
 Kinds of Demand
• The goods whose demand is not linked with the demand of other goods are
supposed to have Autonomous demand

• The demand for certain goods is related with the demand for other goods,
which is called Derived demand
 Types of demand
• Price demand: It refers to various quantities of a good or service that a consumer
would be willing to purchase at all possible prices in a given market at a given point of
time, ceteris paribus

• Income demand: It refers to various quantities of a good or service that a consumer

would be willing to purchase at different levels of income, ceteris paribus

• Cross demand: It refers to various quantities of a good or service that a consumer

would be willing to purchase not due to changes in the price of related commodities
MCQ - 1

The concept of Indifference curve technique for studying consumer

behaviour is based on

A. Cardinality approach

B. Production function approach

C. Quadratic function approach

D. None
MCQ - 2

Properties of indifference curve include

A. Are circular in shape

B. Are concave in shape

C. Does not intersect each other

D. Always touches both X and Y axis

MCQ - 3

Which of the following statements about indifference curves is

true?

A. Indifference curves represent the different levels of income a consumer can

achieve
B. Indifference curves illustrate the trade-offs between two goods that provide the
same level of satisfaction
C. Indifference curves always slope upwards from left to right
D. Indifference curves depict the total utility gained from consuming various combinations of goods
MCQ - 4

When an indifference curve is convex to the origin, it implies

a) The consumer prefers one good to the other at all points along the curve

b) The consumer is indifferent between any combination of the two goods

c) The consumer experiences diminishing marginal rate of substitution

d) The consumer achieves maximum utility at the midpoint of the curve

MCQ - 5

Which of the following best describes an indifference curve map

a) A graphical representation showing the budget constraint and consumer

preferences
b) A plot of various indifference curves showing the different combinations of two
goods yielding equal satisfaction

c) A diagram illustrating the income and substitution effects of a price change

d) A chart displaying the consumer's optimal consumption choices at different

income levels
MCQ - 6
Various quantities of a good or service that a consumer would be
willing to purchase at different levels of income, ceteris paribus
a) Price demand

b) Income demand

c) Cross demand

d) None of the above

MCQ - 7

Consumer according to Indifference curve analysis is when

a) MRS > Inverse Price ratio

b) MRS = Inverse Price ratio

c) MRS < Inverse Price Ratio

d) None of the above

MCQ - 8

Along an indifference curve

a) One commodity is preferred over other

b) Utility gained by various combinations of two goods are same

c) Consumer income is same

d) All of the above

MCQ - 9

Along the budget line,

a) One commodity is preferred over other

b) Utility gained by various combinations of two goods are same

c) Consumer income is same

d) All of the above

MCQ - 10

When consumer income increases, budget line

a) Remains constant

b) Shifts upwards

c) Shifts downwards

d) Any of the above can happen