Prelims High-Yield Explanations & Traps

• the quantity of bananas and x
• the quantity of mangoes
• concepts by using simple diagrams
• measures of utility
• that equation (2
• that the slope of the new budget line is the same as the slope of the
• ‘a change’
• that the vertical intercept of the new budget line is the same as the
• that any point on the budget
• is that the indifference
• and this relation is called
• total utility derived from consuming n units of a commodity x
• the n th unit of the commodity Total utility and marginal utility can also be related in the following way
• that TU derived from consuming n units of bananas is the sum total of marginal utility of first banana (MU 1 ), marginal utility of second banana (MU 2 ), and so on, till the marginal utility of the n th unit
• that MRS equals only the magnitude of the expression /YX∆∆
• MRS=3
• that in order to have more of bananas, the consumer has to forego some mangoes
• the consumer has to pay p 1 rupees per kilograms of banana that she wants to buy
• follows: f(0) = 10; f(1) = 15; f(2) = 18 and f(3) = 20
• follows: f(0) = 100; f(10) = 90; f(15) = 70 and f(20) = 40

Essential Definitions & Formulas

What

utility? Utility of a commodity is its want-satisfying capacity.

Utility

subjective.

TU n

total utility derived from consuming n units of a commodity x.

MU n This simply means that TU derived from consuming n units of bananas

the sum total of marginal utility of first banana (MU 1 ), marginal utility of second banana (MU 2 ), and so on, till the marginal utility of the n th unit.

The same

also shown in the table and graph.

The rate of change in total utility due to change in quantity of commodity consumed

a measure of marginal utility.

What is demand and what

demand curve? The quantity of a commodity that a consumer is willing to buy and is able to afford, given prices of goods and income of the consumer, is called demand for that commodity.

Demand curve is a graphic presentation of various quantities of a commodity that a consumer

willing to buy at different prices of the same commodity, while holding constant prices of other related commodities and income of the consumer.

Quantity is measured along the horizontal axis and price

measured along the vertical axis.

Ordinal Utility Analysis Cardinal utility analysis

simple to understand, but suffers from a major drawback in the form of quantification of utility in numbers.

The consumer

said to be indifferent on the different bundles because each point of the bundles give the consumer equal utility.

Such a curve joining all points representing bundles among which the consumer is indifferent

called an indifference curve.

It

clear that when a consumer gets one more banana, he has to forego some mangoes, so that her total utility level remains the same and she remains on the same indifference curve.

MRS

simply the rate at which the consumer will substitute bananas for mangoes, so that her total utility remains constant.

This tendency for the MRS to fall with increase in quantity of bananas

known as Law of Diminishing Marginal Rate of Substitution.

This

the most common shape of an indifference curve.

An increase in the amount of bananas along the indifference curve

associated with a decrease in the amount of mangoes.

This

called an indifference map of the consumer.

Indifference curve depicting two commodities which are perfect substitutes

a straight line.

As long as marginal utility of a commodity

positive, an individual will always prefer more of that commodity, as more of the commodity will increase the level of satisfaction.

Related PYQs (1)