MU can also be calculated when the change in units consumed is more than one. In the above example, let us assume that 1 util is equal to ₹1. Now, the utility derived from the consumption of cake will be ₹15, which is known as the value of utility in terms of money.

Related Study Materials for Class 12 Economics Chapter 2 Theory of Consumer Behaviour

When the tops of these blocks are joined by a smooth line, we obtain the MU curve. So long as the TU curve is rising, the MU curve is falling. When the former reaches the highest point Q1 the latter touches the X-axis at point С where the MU is zero. When the TU curve starts falling from Q onwards, the MU becomes negative from С onwards.

Changes in the quantity demanded are indicated by movement along the demand curve. According to the IC analysis, a buyer maximises his utility by selecting a package of two commodities that is also within his budget. This will be used to calculate a commodity’s demand curve.

Chapter 1: Introduction

The rate at which a consumer when mu is falling tu is substitutes one good for another as long as the latter good is providing equal satisfaction is known as the marginal rate of substitution. The capacity of a commodity to meet a need is its utility. The more the utility obtained from an item, the greater the need for it or the stronger the desire to have it. The same product can provide various levels of utility to different people. A consumer’s desire for an item is usually determined by the utility (or satisfaction) he obtains from it.

Any point outside the area is a non-attainable combination, which the consumer cannot afford to buy. The law of demand is founded on this principle, as the concept of reduced pricing is related to the Law of Diminishing Marginal Utility. When TU is at its maximum point, MU becomes zero; i.e., when the 5th burger is consumed. The relationship between TU and MU can be explained with the help of the following schedule and diagram. With the help of the above schedule the relationship between MU and TU can be represented in the diagram.

1. According to the law of diminishing marginal utility, as a consumer consumes more units of a commodity, the marginal benefit received from each succeeding unit declines.
2. He was extremely thirsty and grabbed a bottle of cold water to satisfy his thirst.
3. To achieve this, it is required to ascertain the level of satisfaction attained from a certain commodity.

Key Points to Remember about Microeconomics Chapter 2 Theory of Consumer Behaviour Class 12 Notes

This law states that as a consumer consumes more and more units of a specific commodity, the utility (satisfaction) derived from each successive unit consumption goes on falling. Marginal utility is the addition made to total utility by having an additional unit of the commodity. When the consumer consumes the third apple, the total utility becomes 45 utils. Thus, marginal utility of the third apple is 10 utils (45—35).

When total utility is maximum at the 5th unit, marginal utility is zero. When total utility is decreasing, marginal utility is negative (the 6th and the 7th units). These units give disutility or dissatisfaction, so it is no use having them. To draw the curves of total utility and marginal utility, we take total utility from column (2) of Table 1.

By connecting the tops of these rectangles with a smooth line, we get the TU curve that peaks at point Q and then slowly declines. To draw the MU curve, we take marginal utility from column (3) of the table. When a consumer consumes the 6th unit of the commodity, s/he gets no utility or there is zero utility and as a result, total utility (TU) remains constant and becomes maximum. Utility refers to the satisfaction or benefit a consumer gets from consuming a good or service.

This is the point where the slope of both, the indifference curve and budget line are equal to each other. The budget constraint includes all the different combinations of goods or products that a person can afford based on the cost of goods and consumer income. The budget line is a graphical representation of all the bundles that cost the same as the consumer’s income. The budget line depicts two different combinations of goods that a consumer can buy based on his or her income and commodity prices.

Util is assumed as a unit for measuring the satisfaction derived from a commodity. The marginal rate of substitution or MRS is the rate at which the consumer is ready to substitute one good to get one more unit of the other good. This is calculated as the slope of an indifference curve. A shift in the demand curve is caused by changes in non-price factors, such as income, taste, expectation, population, price of comparable commodities, and so on. Movement in the demand curve occurs when a commodity experiences a change in both quantity demanded and price, leading the curve to move in a specific direction.

To achieve the highest level of satisfaction, a consumer must follow certain rules or principles since resources are limited in nature in comparison to limitless demands. The two basic approaches for studying customer behaviour are the Cardinal Utility approach and Ordinal Utility Approach. Eventually, at the fifth sip, we can see that the MU becomes negative. This indicates that the person is deriving negative utility out of his consumption and that any additional sip may affect him adversely. The MU or satisfaction level goes on decreasing with each sip until the third sip of water. The total utility is increasing but at a diminishing rate.