Page 66 - DECO405_MANAGERIAL_ECONOMICS

Unit 4: Consumer Behaviour (Utility Analysis)

Indifference curve also considers the effect of substitution goods. Notes
When the demand price is generally greater than the price actually paid, most consumers
under most circumstances receive some surplus of satisfaction. It is known as consumer
surplus.
When the supply price is less than the price actually received, most producers under most
circumstances receive some surplus of revenue. It is known as producer surplus.

4.8 Keywords

Budget line: It represents different combination of two goods which the consumer can buy by
spending all his incomes
Cardinal measure of utility: Utility is a measurable and quantifiable
Marginal utility: Utility derived from every next unit

Price consumption curve: The line connecting such (drawn because of change in price) successive
equilibrium points is called PCC or price consumption curve
The indifference curve: The curve at which satisfaction is equal at each point

4.9 Self Assessment

1. State true or false for the following statements:
(a) With more units of consumption total utility increases and marginal utility also
increases.
(b) The total utility reaches a maximum value when marginal utility approaches zero.

(c) The law of demand can be derived from the law of diminishing marginal utility.
(d) Assumption of ordinal utility implies that utility is not measurable.
(e) The utilities derived from different independent goods cannot be added.
(f) Almost all the goods in a market are related goods either by way of complementarity
or substitutability.
(g) The traditional marginal utility analysis ignored the income - effect assumption of
constant marginal utility of money spent.

2. Fill in the blanks:
(a) Indifference curve represents a particular level of ........................ .
(b) Budget line is also known as the ........................ .
(c) The slope of indifference curve indicates the ........................ .

(d) The consumer is ........................ about any two points on the indifference curve.
(e) The concept of Ordinal Utility was given by ............... .
(f) The total utility reaches a maximum value, when marginal utility approaches ..........
(g) The goal of consumption is to maximize ................ .
(h) The law of diminishing marginal utility assumes constant marginal utility of ..........

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