Complete Summary and Solutions for Theory of Consumer Behaviour – NCERT Class XII Economics, Chapter 2 – Utility Analysis, Budget Constraints, Demand Curve, Elasticity
This chapter explains the behavior of an individual consumer in choosing goods based on budget constraints and preferences. It covers Cardinal Utility Analysis and Ordinal Utility Analysis, indifference curves, budget sets, consumer's optimum, demand function, law of demand, market demand, and price elasticity of demand with detailed examples, diagrams, and exercises.
Tags: Consumer Behaviour, Utility, Marginal Utility, Indifference Curve, Budget Set, Demand Curve, Law of Demand, Market Demand, Elasticity of Demand, NCERT, Class 12, Economics, Chapter 2, Summary, Questions, Answers
Theory of Consumer Behaviour - Class 12 NCERT Chapter 2 Ultimate Study Guide 2025
Theory of Consumer Behaviour
Chapter 2: Theory of Consumer Behaviour - Ultimate Study Guide | NCERT Class 12 Notes, Questions, Examples & Quiz 2025
Full Chapter Summary & Detailed Notes - Theory of Consumer Behaviour Class 12 NCERT
Overview & Key Concepts
Chapter Goal: Explain how consumers maximize satisfaction from limited income; covers cardinal/ordinal utility, indifference curves, budget constraints. Exam Focus: Utility measures, DMU, IC features, MRS, budget line (diagrams, derivations); 2025 Updates: Real-world apps (e.g., digital goods utility, inflation on budgets). Fun Fact: Utility is subjective – a coffee's value rises during exams. Core Idea: Preferences + affordability = optimal bundle; interlinks choices with markets. Real-World: Shopping decisions, policy (subsidies). Expanded: All subtopics (2.1-2.2) point-wise with evidence, examples, debates (cardinal vs. ordinal realism); added consumer psychology, modern examples (e.g., streaming services as substitutes).
Wider Scope: Foundations for demand theory; two-good simplicity for diagrams; sources: Hypotheticals, tables/graphs.
Expanded Content: Include TU/MU tables, IC derivations, budget math; multi-disciplinary (psychology in preferences).
Total and Marginal Utility Diagram (Figure 2.1 Description)
X-axis: Quantity of commodity (0-6 units); Y-axis: Utility units (0-30). TU curve rises then flattens (peaks at 24), MU declines from 12 to -2. Shows DMU: MU falls as consumption increases.
Preliminary Notations and Assumptions
Consumer Choice Problem: Decide spending on goods for max satisfaction; depends on preferences (likes) and budget (income/prices).
Approaches: (i) Cardinal Utility (measurable utils); (ii) Ordinal (ranking bundles).
Expanded: Real examples (e.g., food vs. entertainment); debates (two-good limit vs. multi-good reality); notes on goods including services.
2.1 Utility
Definition: Want-satisfying power of a commodity; subjective (varies by person, time, place); e.g., chocolate higher for lovers, heater in winter/Ladakh.
Expanded: Ties to psychology (diminishing desire); examples (water vs. diamonds paradox preview).
2.1.1 Cardinal Utility Analysis
Assumption: Utility measurable in numbers (e.g., shirt = 50 utils).
Measures of Utility:
Total Utility (TU): Total satisfaction from n units; TUn = sum of MUs; increases with quantity but at diminishing rate.
Marginal Utility (MU): Additional satisfaction from one more unit; MUn = TUn - TUn-1; e.g., 5th banana: MU5 = 30 - 28 = 2.
Example Table 2.1: Units 1-6; TU: 12,18,22,24,24,22; MU:12,6,4,2,0,-2. TU peaks at 5 units, MU zero then negative.
Law of Diminishing Marginal Utility (DMU): MU falls as consumption rises (other goods constant); reason: Desire weakens after some consumption; e.g., successive bananas less satisfying.
Implications: Explains why TU rises at decreasing rate; MU=0 when TU constant; negative MU when TU falls (disutility).
Derivation of Demand Curve (Single Commodity): Demand = quantity affordable/willing at price; curve: Downward sloping (negative price-quantity relation = Law of Demand).
Explanation via DMU: Lower MU for extra units → willing to pay less; e.g., at Rs.40, demand 5 units; 6th unit only if price < Rs.40 (Figure 2.2: Downward curve, x-axis quantity, y-axis price).
X-axis: Quantity (0-100); Y-axis: Price (Rs.0-40). Downward curve from (0,40) to (100,0); shows more quantity at lower prices due to DMU.
2.1.2 Ordinal Utility Analysis
Drawback of Cardinal: Unrealistic numbering; ordinal ranks bundles (more/less preferred) without numbers.
Indifference Curve (IC): Locus of bundles giving equal utility (indifferent); e.g., points A,B,C,D on IC (Figure 2.3: Downward curve, x-axis bananas, y-axis mangoes).
Slope & Marginal Rate of Substitution (MRS): IC downward (more bananas → fewer mangoes for same utility); MRS = |Δy/Δx| = mangoes forgone for +1 banana; e.g., MRS=3 means 3 mangoes for 1 banana.
Law of Diminishing MRS: MRS falls as bananas rise (MU_banana falls, MU_mango rises); Table 2.2: Combos A(1,15)-D(4,9); MRS 3:1 → 1:1. Reason: Less willingness to sacrifice as one good dominates.
Shape of IC: Convex to origin (diminishing MRS); straight for perfect substitutes (constant MRS=1); e.g., 5-rupee notes/coins (Table 2.3: Constant 1:1; Figure 2.4: Straight line).
Indifference Map: Family of ICs (Figure 2.5: Parallel downward curves); higher IC = preferred (monotonic preferences: more of one good ≥ other preferred).
Features of IC:
Downward Slope: Increase one good requires decrease other (Figure 2.6: From left-right, slope negative; Δx1>0 → Δx2<0).
Higher IC Better: Positive MU → prefer more; Table 2.4: A(1,10), B(2,10), C(3,10) on rising ICs (Figure 2.7: Higher curves for more bananas).
No Intersection: Leads to contradiction (same utility conflicting); e.g., IC1/IC2 cross at A, but B>C impossible (Figure 2.8: Points A,B on IC1; A,C on IC2 → B=C absurd).
Monotonic Preferences: Bundle with ≥ one good and > other preferred; ensures higher IC better.
All terms from chapter; detailed with examples, relevance. Expanded: 40+ terms grouped by subtopic; added advanced like "MRS", "budget line" for depth/easy flashcards.
Utility
Want-satisfying capacity. Ex: Chocolate satisfaction. Relevance: Basis of demand.
Total Utility (TU)
Total satisfaction from quantity. Ex: 5 bananas=30 utils. Relevance: Cumulative benefit.
Marginal Utility (MU)
Additional from one unit. Ex: 5th banana=2 utils. Relevance: Diminishing law.
Law of Diminishing MU
MU falls with consumption. Ex: Successive apples. Relevance: Downward demand.
Demand Curve
Price-quantity relation. Ex: Lower price, more buy. Relevance: Law of demand.
Same IC. Ex: Trade-offs equal. Relevance: Curve points.
Opportunity Cost (Budget)
p1/p2. Ex: Bananas forgone for mango. Relevance: Slope.
Fixed Income
M constant. Ex: Rs20. Relevance: Constraint.
Prevailing Prices
Market p1,p2. Ex: Rs5 each. Relevance: Line position.
Tip: Group by section (utility/IC/budget); examples for recall. Depth: Debates (e.g., ordinal superiority). Errors: Confuse TU/MU. Historical: Marshall cardinal. Interlinks: To Ch4. Advanced: MRS math. Real-Life: Grocery budgets. Graphs: IC shifts. Coherent: Evidence → Interpretation. For easy learning: Flashcard per term with example.
60+ Questions & Answers - NCERT Based (Class 12) - From Exercises & Variations
Based on chapter + expansions. Part A: 10 (1 mark, one line), Part B: 10 (4 marks, five lines), Part C: 10 (6 marks, eight lines). Answers point-wise in black text.
Part A: 1 Mark Questions (10 Qs - Short)
1. What is utility in economics?
1 Mark Answer:Want-satisfying capacity of a commodity.
2. Define marginal utility.
1 Mark Answer:Change in total utility from one additional unit.
3. What is the law of diminishing marginal utility?
1 Mark Answer:MU declines as consumption increases.
4. Name one feature of indifference curve.
1 Mark Answer:Slopes downward from left to right.
5. What is MRS?
1 Mark Answer:Rate at which one good substitutes another for same utility.
6. Define budget set.
1 Mark Answer:All bundles affordable with income at prices.
7. What is the slope of budget line?
1 Mark Answer:Negative ratio of prices (-p1/p2).
8. Why do indifference curves not intersect?
1 Mark Answer:Leads to contradictory utility rankings.
9. What is cardinal utility analysis?
1 Mark Answer:Utility measured in numbers.
10. Define ordinal utility.
1 Mark Answer:Utility ranked without numbers.
Part B: 4 Marks Questions (10 Qs - Medium, Exactly 5 Lines Each)
1. Explain measures of utility.
4 Marks Answer:
Total Utility (TU): Satisfaction from fixed quantity.
Example: 4 bananas = 28 utils.
Marginal Utility (MU): Change in TU from extra unit.
MU5 = TU5 - TU4 = 30 - 28 = 2.
TU = sum of MUs; MU diminishes.
2. Describe law of diminishing MU.
4 Marks Answer:
MU falls with increased consumption.
Reason: Desire weakens after some units.
Example: Table 2.1, MU from 12 to -2.
Implies TU rises at decreasing rate.
Explains downward demand curve.
3. How does DMU derive demand curve?
4 Marks Answer:
Lower MU for extra units → lower willingness to pay.
At Rs.40, demand 5 units; 6th needs price drop.
Results in negative price-quantity slope.
Figure 2.2: Downward curve.
Law of Demand: Inverse relation.
4. Define and explain indifference curve.
4 Marks Answer:
Locus of equal-utility bundles.
Downward slope: Trade-off for constancy.
Example: A(1,15), B(2,12) on IC.
Figure 2.3: Convex curve.
Ordinal: Ranks without numbers.
5. Explain law of diminishing MRS.
4 Marks Answer:
MRS falls as one good increases.
Reason: MU of gaining good falls, losing rises.
Table 2.2: 3:1 to 1:1.
Causes convex IC shape.
Example: Fewer mangoes sacrificed later.
6. Describe shape of IC for perfect substitutes.
4 Marks Answer:
Straight line: Constant MRS.
Example: 5-rupee notes/coins (1:1).
Table 2.3: Indifferent combos.
Figure 2.4: Linear slope.
No diminishing trade-off.
7. Why higher IC preferred?
4 Marks Answer:
Monotonic: More goods = higher utility.
Positive MU: Extra good adds satisfaction.
Table 2.4: B(2,10) > A(1,10).
Figure 2.7: Upper curves better.
Map shows ordering.
8. Why ICs do not intersect?
4 Marks Answer:
Contradicts rankings: A=B and A=C implies B=C absurd.
Example: B has more mangoes than C.
Figure 2.8: Crossing leads conflict.
Violates transitivity.
Ensures consistent preferences.
9. Explain budget constraint.
4 Marks Answer:
p1x1 + p2x2 ≤ M.
Limits affordable bundles.
Example: M=20, p=5: Max 4 units each.
Set: Area ≤ line.
Influences choices.
10. Describe budget line.
4 Marks Answer:
Equality: p1x1 + p2x2 = M.
Intercepts: M/p1, M/p2.
Slope: -p1/p2 (trade-off).
Example 2.1: From (4,0) to (0,4).
Boundary of set.
Part C: 6 Marks Questions (10 Qs - Long, Exactly 8 Lines Each)
1. Explain cardinal utility analysis with measures.
6 Marks Answer:
Assumes utility in numbers.
TU: Total from quantity; e.g., 5 units=30.
MU: ΔTU/Δunit; formula MUn=TUn-TUn-1.
Table 2.1: TU rises, MU falls.
DMU: MU declines; explains demand slope.
Demand: Lower MU → lower price tolerance.
Drawback: Unrealistic quantification.
Leads to ordinal alternative.
2. Derive demand curve using DMU.
6 Marks Answer:
Demand: Willing/affordable quantity at price.
DMU: Successive units lower MU.
Willing pay = MU; falls with quantity.
Example: 5 units at Rs.40 (MU=2); 6th lower.
Figure 2.2: Downward curve.
Law of Demand: Negative relation.
Constant other prices/income.
Basis for market demand.
3. Discuss ordinal utility and IC.
6 Marks Answer:
Ranks bundles, no numbers.
IC: Equal utility points; downward.
MRS: Slope |Δmango/Δbanana|.
Diminishing MRS: Convex shape.
Table 2.2: MRS 3:1 to 1:1.
Map: Higher IC preferred (monotonic).
Features: No intersect, downward.
Realistic for preferences.
4. Explain features of IC.
6 Marks Answer:
Downward: Compensation for increase.
Higher better: Positive MU.
No intersect: Avoids contradiction.
Figure 2.8: B > C impossible.
Convex: Diminishing MRS.
Straight for substitutes.
Monotonic: More preferred.
Basis for consumer equilibrium.
5. Describe diminishing MRS with example.
6 Marks Answer:
MRS falls with more of one good.
Reason: MU gaining falls, losing rises.
Table 2.2: A(1,15) MRS blank; B 3:1; C 2:1; D 1:1.
Figure 2.3: Flattening slope.
Convex IC result.
Example: Less mango sacrifice as bananas rise.
Real: Coffee-tea trade-off eases.
Ties to preferences.
6. Explain budget set and line.
6 Marks Answer:
Set: Bundles ≤ M (p1x1 + p2x2).
Line: = M; intercepts M/p1, M/p2.
Slope -p1/p2: Relative prices.
Example 2.1: Rs20, Rs5 each; (0,4) to (4,0).
Affordable inside/boundary.
Infeasible outside.
Shifts with income/prices.
Constraints choices.
7. Compare cardinal and ordinal analysis.
6 Marks Answer:
Cardinal: Numbers (TU/MU); derives demand via DMU.
Ordinal: Ranking (IC/MRS); no quantification.
Cardinal simple but unrealistic.
Ordinal realistic, graphical.
Both explain choices.
Cardinal: Measurable utils.
Ordinal: Preference order.
Leads to indifference approach.
8. Why IC slopes downward?
6 Marks Answer:
To keep utility constant.
More bananas need fewer mangoes.
Monotonic: No free lunch.
Figure 2.6: Negative slope.
Δx1 >0 → Δx2 <0.
Trade-off essential.
Violate → higher IC.
Basis for MRS.
9. Discuss perfect substitutes IC.
6 Marks Answer:
Constant MRS: Straight line.
No diminishing trade-off.
Example: Notes/coins (Table 2.3).
Figure 2.4: Linear slope -1.
Indifferent as total value same.
Slope = -1 for equal value.
Real: Tea/coffee if identical.
Contrast convex usual.
10. Explain consumer's budget with example.
6 Marks Answer:
Fixed M limits bundles.
Constraint: p1x1 + p2x2 ≤ M.
Set: Feasible area.
Example 2.1: Rs20, Rs5; bundles like (2,2).
(3,3) infeasible >20.
Line: Exhausts income.
Integral: Discrete units.
Ties to equilibrium.
Tip: Diagrams for IC/budget; practice lines. Additional 30 Qs: Variations on MRS, DMU.
Key Concepts - In-Depth Exploration
Core ideas with examples, pitfalls, interlinks. Expanded: All concepts with steps/examples/pitfalls for easy learning. Depth: Debates, analysis.
Utility
Steps: 1. Identify want-satisfaction, 2. Note subjectivity, 3. Link to demand. Ex: Chocolate=high for lover. Pitfall: Assume objective. Interlink: Basis of TU/MU. Depth: Time/place variant.
