Page 86 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 6: Consumer Behaviour: Ordinal Approach

6.6 Keywords Notes

Budget line: It represents different combination of two goods which the consumer can buy by
spending all his incomes.

Consumer surplus: the amount that consumers benefit by being able to purchase a product for a
price that is less than they would be willing to pay
Indifference curve: The curve at which satisfaction is equal at each point.
Marginal rate of substitution: the rate at which a consumer is ready to give up one good in
exchange for another good while maintaining the same level of satisfaction
Price consumption curve: The line connecting such (drawn because of change in price) successive
equilibrium points is called PCC or price consumption curve.
Producer’s surplus: the amount that a producer receives from the sale of a good and the lowest
amount that producer is willing to accept for that good.

6.7 Self Assessment

State whether the following statements are true or false:
1. Each point on the indifference curve represents combination of goods that give same level
of satisfaction to consumers.
2. Budget line represents different combinations of two goods X and Y which the consumer
can buy by spending all his income.

3. The point at which consumer gets maximum satisfaction is referred to as consumer’s
equilibrium.
4. The slope of the budget line depends on the price ratio.

5. Marginal Rate of Substitution is the ratio of marginal utilities of two commodities in
question.
Fill in the blanks:
6. Indifference curve represents a particular level of ........................ .

7. Budget line is also known as the ........................ .
8. The slope of indifference curve indicates the ........................ .
9. The consumer is ........................ about any two points on the indifference curve.
10. The concept of Ordinal Utility was given by ............... .

6.8 Review Questions

1. Every utility function uniquely determines the ordinal preferences, but for any ordinal
preferences, there are many utility functions that represent those preferences. Is this
statement true or false? Explain with reasons.

2. Manish is a typical economics graduate student and consumes 2 goods: economics text
books and coffee. He also earns a part time earning of ` 2000 a month. He can either spend
it all on books and get 5 or on coffee and get 20 cups.
(a) Given this information, construct the equation for Manish’s budget line (put books
on the x-axis and coffee on the y-axis).

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