1. The Consumer’s Optimization Problem
Individual consumption decisions are made with the goal of maximizing total satisfaction from consuming various goods and services

2. Consumer Theory Assumes buyers are completely informed about:
Range of products available
Prices of all products
Capacity of products to satisfy
Their income

3. Indifference Curves
Locus of points representing different bundles of goods, each of which yields the same level of total utility
Negatively sloped & convex

4. Properties of Consumer Preferences
Completeness
For every pair of consumption bundles, A and B, the consumer can say one of the following:
A is preferred to B
B is preferred to A
The consumer is
indifferent between A and B

5. Properties of Consumer Preferences
Transitivity
If X is preferred to Y, and Y is preferred to Z, then X must be preferred to Z

6. Properties of Consumer Preferences
Nonsatiation
More of a good is always preferred to less

7. Utility
The benefits consumers obtain from the goods and services they consume is called utility.
A utility function shows an individual’s perception of the utility level attained from consuming each conceivable bundle of goods

8. Marginal Utility
Addition to total utility attributable to the addition of one unit of a good to the current rate of consumption, holding constant the amounts of all other goods consumed
MU= Changes in Total Utility /
Change in No of Units Consumed

9. Constrained Utility Maximization (Figure 5.8)50 A • I • E
III • D IV 45
Quantity of pizzas C • B II R T 40 30 20 15 10 10 20 30 40 50 60 70 80 90
100
Quantity of burgers

10. Marginal Rate of Substitution
MRS shows the rate at which one good can be substituted for another while keeping utility constant
Negative of the slope of the indifference curve
Diminishes along the indifference curve as X increases & Y decreases
Ratio of the marginal utilities of the goods

11. How to get MRS Formula U = ƒ(XY) (Here, U= Utility; X,Y= 2 goods)
by differentiation,
dU= ƒ1dX + ƒ2dY Here, ƒ1= ΔU/ ΔX = MUx
ƒ2= ΔU/ ΔY = MUy
as per indifference curve, U remains constant. So, U = 0
→ ƒ1dX + ƒ2dY = 0
→ ƒ1dX = - ƒ2dY
→ ƒ1 / ƒ2 = - dX/dY
as indifference curve is neutral, so….
IdX/dYI = I ƒ1 / ƒ2 I = MUx/ MUy
So, MRSxy = MUx/ MUy

12. Slope of an Indifference Curve & the MRS (Figure 5.3)
600
800 A B T T’
Quantity of good Y
C (360,320)
320
360
Quantity of good X

13. MRS = slope of indifference curve = slope of tangent line

14. The slope is 35/35 = 1

15. MRS = − ΔY /ΔX = 5 /10 = 1 2 5 10

16. 10:5 or 2:1 Before, − ΔY /ΔX = 5/10 or 1/ 2,
After, − ΔX/ ΔY = 10/5 or 2
10:5 or 2:1 5 10

18. Consumer’s Budget Line
Shows all possible commodity bundles that can be purchased at given prices with a fixed money income or

19. Consumer’s Budget Constraint (Figure 5.5)

20. Typical Budget Line (Figure 5.6)• A B
Quantity of Y
Quantity of X

21. Shifting Budget Lines (Figure 5.7)
120
240 A
Panel B – Changes in price of X
200
100 A B
100
250 D
125 C F Z 80
160
Quantity of Y
Quantity of Y B
200
Quantity of X
Quantity of X
Panel A – Changes in money income

22. The following figure shows a portion of a consumer’s indifference map
The following figure shows a portion of a consumer’s indifference map. The
consumer faces the budget line ZL, and the price of Y is $20.
600
The consumer's income = $__________. The price of X is $_____________. 20

23. The following figure shows a portion of a consumer’s indifference map
The following figure shows a portion of a consumer’s indifference map. The
consumer faces the budget line ZL, and the price of Y is $20.
The equation for the budget line ZL is Y = ______________________.
30 - 1x
30/ 30

24. The following figure shows a portion of a consumer’s indifference map
The following figure shows a portion of a consumer’s indifference map. The
consumer faces the budget line ZL, and the price of Y is $20.
What combination of X and Y would the consumer choose? Why?
15X and 15Y

25. consumer faces the budget line ZL, and the price of Y is $20.
The following figure shows a portion of a consumer’s indifference map. The
consumer faces the budget line ZL, and the price of Y is $20.
The marginal rate of substitution at the combination in part c is __________.
MRS=Px / PY
= 20 / 20
= 1

26. The following figure shows a portion of a consumer’s indifference map
The following figure shows a portion of a consumer’s indifference map. The
consumer faces the budget line ZL, and the price of Y is $20.
If the budget line pivots to ZM, the consumer chooses _______ units of good X and _________ units of good Y. 10 15

27. The following figure shows a portion of a consumer’s indifference map
The following figure shows a portion of a consumer’s indifference map. The
consumer faces the budget line ZL, and the price of Y is $20.
Along budget line ZM, the price of X is $_________ and the price of Y is
$________. 20 30

28. The following figure shows a portion of a consumer’s indifference map
The following figure shows a portion of a consumer’s indifference map. The
consumer faces the budget line ZL, and the price of Y is $20.
MRS= 30/ 20 =1
The new MRS is equal to __________.

29. The figure below shows a portion of a consumer’s indifference map, and a budget line. The consumer’s income is $1,200 and the price of Y is $6.
Using the given budget line, what is one point on the consumer’s demand for X?
(Both Price & Quantity)
Px = $1,200/200 = $6 and
X = 100

30. The figure below shows a portion of a consumer’s indifference map, and a budget line. The consumer’s income is $1,200 and the price of Y is $6.
Pivot the budget line and derive two other points on the consumer’s demand for X.
At A, Px = $1,200/100 = $12 and X = 50
At B, Px = $1,200/200 = $6 and X = 100
At C, Px = $1,200/300 = $4 and X = 150

31. Market Demand
Market demand is a list of prices and the quantities consumers are willing and able
to purchase at each price in the list, other things being held constant.
Marketdemand is derived by horizontally summing the demand curves for all the individuals in the market.

32. Derivation of Market Demand
Quantity demanded
Price
Consumer 1
Consumer 2
Consumer 3
Market demand $6 3 12 13 5 8 10 7 10 1 3 5 6 8 1 4 3 5 6 4 12 3 19 2 25 1 31

33. Derivation of Market Demand Figure (5.10)