Class 12 Economics Notes Chapter 2: Theory of Consumer Behaviour

Introduction

A consumer has limited income but unlimited wants. Therefore, the consumer has to decide how to spend income to obtain the highest possible satisfaction.

Consumer behaviour explains how consumers make purchasing decisions.

Utility

Meaning

Utility means the satisfaction a consumer receives from consuming a good or service.

Example:
A hungry person gets high utility from food, while a full person gets less utility from the same food.

Features

Utility is subjective.
It differs from person to person.
It changes with time and place.
Utility is not the same as usefulness.

Approaches to Consumer Behaviour

There are two approaches:

Cardinal Utility Analysis
Ordinal Utility Analysis

Cardinal Utility Analysis

According to this approach,

Utility can be measured in numbers.
Satisfaction is expressed in units called utils.

Total Utility (TU)

Definition

Total Utility is the total satisfaction obtained from consuming different units of a commodity.

Formula

TU = Sum of Marginal Utilities

Marginal Utility (MU)

Definition

Marginal Utility is the additional satisfaction received from consuming one extra unit of a commodity.

Formula

MU = Change in Total Utility

MU = TUₙ − TUₙ₋₁

Relationship between TU and MU

Total Utility	Marginal Utility
TU increases	MU is positive
TU is maximum	MU becomes zero
TU decreases	MU becomes negative

Law of Diminishing Marginal Utility

Statement

As a consumer consumes more and more units of the same commodity continuously, the additional satisfaction from each extra unit gradually decreases.

Assumptions

Consumption is continuous.
Units are identical.
Consumer is rational.
Income remains constant.
Tastes and preferences do not change.

Example

Ice Creams	Marginal Utility
1st	Very High
2nd	High
3rd	Moderate
4th	Low
5th	Zero

Importance

Explains Law of Demand.
Helps consumers spend income wisely.
Helps firms decide pricing.
Useful in taxation policy.

Limitations

Utility cannot actually be measured in numbers.
Assumptions are unrealistic.
Consumer behaviour is difficult to predict.

Law of Demand

Statement

Other things remaining constant, when price increases, demand decreases, and when price decreases, demand increases.

Thus,

Price ↑ → Demand ↓

Price ↓ → Demand ↑

Ordinal Utility Analysis

This approach states that:

Utility cannot be measured in numbers.
Consumers only rank their preferences.

Example:

A student may prefer

Pizza > Burger > Sandwich

without measuring satisfaction numerically.

Indifference Curve

Meaning

An Indifference Curve shows different combinations of two goods that provide equal satisfaction to the consumer.

The consumer is indifferent among all these combinations.

Marginal Rate of Substitution (MRS)

Definition

MRS is the rate at which a consumer is willing to sacrifice one good to obtain one additional unit of another good while keeping satisfaction unchanged.

Law of Diminishing MRS

As a consumer gets more of one good, they are willing to give up less and less of the other good.

Therefore,

MRS decreases continuously.

Features of Indifference Curve

1. Downward Sloping

If one good increases, the other must decrease to keep satisfaction constant.

2. Convex to the Origin

Because of diminishing MRS, the curve is convex.

3. Higher Indifference Curve Gives More Satisfaction

A curve farther from the origin represents a higher level of satisfaction.

4. Two Indifference Curves Never Intersect

If they intersect, it creates contradictory levels of satisfaction, which is impossible.

Indifference Map

An Indifference Map is a collection of many indifference curves showing different levels of satisfaction.

Higher curves indicate greater satisfaction.

Important Exam Definitions

Utility

The satisfaction obtained from consuming a good.

Total Utility

Total satisfaction from consuming all units of a commodity.

Marginal Utility

Additional satisfaction from one extra unit.

Indifference Curve

A curve showing combinations of two goods giving equal satisfaction.

Marginal Rate of Substitution

Rate at which one good is exchanged for another while maintaining the same satisfaction.

Quick Revision

✔ Utility = Satisfaction

✔ TU = Total Satisfaction

✔ MU = Additional Satisfaction

✔ TU rises → MU positive

✔ TU maximum → MU zero

✔ TU falls → MU negative

✔ MU diminishes with consumption

✔ Demand and price have an inverse relationship

✔ Indifference Curve = Equal Satisfaction

✔ Higher IC = Higher Satisfaction

✔ IC never intersect

✔ IC slopes downward

Consumer’s Budget

Meaning

A consumer has limited income and cannot buy everything they want.

The budget shows the maximum amount of goods a consumer can purchase with a given income.

Budget Set

Definition

The Budget Set is the collection of all combinations of two goods that a consumer can afford with the given income.

Budget Constraint

A consumer can buy only those combinations whose total expenditure is less than or equal to income.

Formula

P₁X₁ + P₂X₂ ≤ M

Where,

P₁ = Price of Good X
X₁ = Quantity of Good X
P₂ = Price of Good Y
X₂ = Quantity of Good Y
M = Consumer’s Income

Budget Line

Definition

The Budget Line shows all combinations of two goods on which the consumer spends the entire income.

Equation

P₁X₁ + P₂X₂ = M

Every point on the budget line represents full utilisation of income.

Slope of Budget Line

Formula

Slope = – P₁ / P₂

The slope shows the rate at which one good can be exchanged for another in the market.

Changes in Budget Line

1. Change in Income

Income Increases

Budget line shifts parallel outward
Consumer can buy more goods.

Income Decreases

Budget line shifts parallel inward
Consumer can buy fewer goods.

2. Change in Price of a Good

Price Falls

Budget line rotates outward.
Purchasing power increases.

Price Rises

Budget line rotates inward.
Purchasing power decreases.

Consumer’s Equilibrium

Meaning

Consumer’s equilibrium is the point where the consumer gets maximum satisfaction while spending the entire income.

Conditions of Consumer Equilibrium

In Cardinal Utility Analysis

A consumer is in equilibrium when:

MU = Price

MUx/Px = MUy/Py

The last rupee spent on every commodity should provide equal satisfaction.

In Ordinal Utility Analysis

A consumer is in equilibrium where:

Budget Line is tangent to the Indifference Curve.
Consumer reaches the highest possible Indifference Curve within the budget.

Equilibrium Condition

MRS = Price Ratio

MRS = P₁ / P₂

Demand

Meaning

Demand is the quantity of a commodity that a consumer is willing and able to buy at a given price during a given period.

Factors Affecting Demand

Price of the commodity
Income of the consumer
Prices of related goods
Taste and preferences
Future expectations
Number of consumers

Law of Demand

Statement

Other things remaining constant,

When price rises, demand falls.
When price falls, demand rises.

Therefore,

Price and Demand have an inverse relationship.

Demand Schedule

A demand schedule is a table showing different quantities demanded at different prices.

Price	Demand
High	Low
Medium	Medium
Low	High

Demand Curve

A Demand Curve is the graphical representation of the relationship between price and quantity demanded.

Characteristics

Downward sloping
Shows inverse relationship between price and demand

Why Does Demand Curve Slope Downward?

Law of Diminishing Marginal Utility
Income Effect
Substitution Effect
More consumers buy at lower prices

Normal Goods

Definition

Goods whose demand increases when income increases.

Examples

Branded clothes
Milk
Fruits
Electronics

Inferior Goods

Definition

Goods whose demand decreases when income increases.

Examples

Coarse cereals
Low-quality products
Local substitutes

Substitute Goods

Meaning

Goods that can replace each other.

Examples

Tea and Coffee
Butter and Margarine
Pepsi and Coke

Relationship

Price of one good ↑ → Demand for the substitute ↑

Complementary Goods

Meaning

Goods used together.

Examples

Car and Petrol
Pen and Ink
Tea and Sugar
Mobile and Charger

Relationship

Price of one good ↑ → Demand for the other ↓

Movement Along the Demand Curve

Movement occurs only because of a change in the price of the commodity itself.

Types

Extension of Demand

Price falls
Demand increases

Contraction of Demand

Price rises
Demand decreases

Shift in Demand Curve

A shift occurs because of factors other than the commodity’s own price.

Rightward Shift (Increase in Demand)

Reasons:

Income increases (for normal goods)
Price of substitute rises
Price of complement falls
Favourable change in taste

Leftward Shift (Decrease in Demand)

Reasons:

Income falls (for normal goods)
Price of substitute falls
Price of complement rises
Unfavourable change in taste

Difference Between Movement and Shift in Demand

Movement Along Curve	Shift of Demand Curve
Caused by change in own price	Caused by other factors
Same demand curve	New demand curve
Extension or contraction	Increase or decrease in demand

Market Demand

Meaning

Market Demand is the total demand of all consumers in the market at a particular price.

Formula

Market Demand = Sum of Individual Demands

Quick Revision

✔ Budget Set = All affordable combinations

✔ Budget Line = Full use of income

✔ Budget Line Equation = P₁X₁ + P₂X₂ = M

✔ Budget Constraint = P₁X₁ + P₂X₂ ≤ M

✔ Slope of Budget Line = –P₁/P₂

✔ Income ↑ → Budget line shifts outward

✔ Income ↓ → Budget line shifts inward

✔ Price ↓ → Budget line rotates outward

✔ Price ↑ → Budget line rotates inward

✔ Consumer Equilibrium (Ordinal) → MRS = Price Ratio

✔ Consumer Equilibrium (Cardinal) → MUx/Px = MUy/Py

✔ Demand = Willingness + Ability to Buy

✔ Normal Goods → Income ↑, Demand ↑

✔ Inferior Goods → Income ↑, Demand ↓

✔ Substitutes → Price of one ↑, Demand for other ↑

✔ Complements → Price of one ↑, Demand for other ↓

✔ Market Demand = Sum of Individual Demands

Questions

Choose the Correct Answer

1. Utility refers to:
A. Cost of production
B. Satisfaction obtained from consumption
C. Income earned
D. Price of a commodity

Answer: B

2. Which approach measures utility in numerical terms?
A. Ordinal Approach
B. Cardinal Approach
C. Modern Approach
D. Indifference Approach

Answer: B

3. Marginal Utility means:
A. Total satisfaction
B. Additional satisfaction from one more unit
C. Average satisfaction
D. Utility from all goods

Answer: B

4. Total Utility is:
A. Always constant
B. Sum of Marginal Utilities
C. Equal to price
D. Less than Marginal Utility

Answer: B

5. According to the Law of Diminishing Marginal Utility, MU:
A. Increases continuously
B. Remains constant
C. Decreases as consumption increases
D. Becomes infinite

Answer: C

6. When Total Utility is maximum, Marginal Utility becomes:
A. Positive
B. Negative
C. Zero
D. Infinite

Answer: C

7. Marginal Utility becomes negative when:
A. Total Utility increases
B. Total Utility is maximum
C. Total Utility decreases
D. Consumption begins

Answer: C

8. Utility is:
A. Same for every person
B. Objective
C. Subjective
D. Fixed forever

Answer: C

9. Which of the following is NOT an assumption of the Law of Diminishing Marginal Utility?
A. Consumer is rational
B. Units consumed are identical
C. Consumer’s income changes continuously
D. Consumption is continuous

Answer: C

10. The Law of Diminishing Marginal Utility helps explain:
A. Law of Supply
B. Law of Demand
C. Law of Returns
D. National Income

Answer: B

11. Which statement is correct?
A. Utility and usefulness are always the same.
B. Utility depends on consumer preferences.
C. Utility is measured in kilograms.
D. Utility is always positive.

Answer: B

12. The satisfaction from consuming all units of a commodity is called:
A. Marginal Utility
B. Average Utility
C. Total Utility
D. Price Utility

Answer: C

13. The additional satisfaction from consuming the fifth unit is called:
A. Total Utility
B. Average Utility
C. Marginal Utility
D. Consumer Surplus

Answer: C

14. Which utility approach uses Indifference Curves?
A. Cardinal
B. Ordinal
C. Classical
D. Monetary

Answer: B

15. In the Ordinal Approach, utility is:
A. Measured in numbers
B. Measured in rupees
C. Ranked according to preference
D. Always equal

Answer: C

16. An Indifference Curve represents combinations of goods giving:
A. Equal cost
B. Equal income
C. Equal satisfaction
D. Equal production

Answer: C

17. The slope of an Indifference Curve is:
A. Upward
B. Downward
C. Horizontal
D. Vertical

Answer: B

18. A higher Indifference Curve indicates:
A. Lower satisfaction
B. Same satisfaction
C. Higher satisfaction
D. Zero satisfaction

Answer: C

19. Two Indifference Curves never intersect because:
A. Prices change
B. Income changes
C. It leads to contradictory satisfaction levels
D. Consumers are irrational

Answer: C

20. Marginal Rate of Substitution (MRS) means:
A. Price ratio
B. Income ratio
C. Rate of sacrificing one good for another while maintaining equal satisfaction
D. Quantity demanded

Answer: C

21. According to the Law of Diminishing MRS, MRS:
A. Increases
B. Remains constant
C. Decreases
D. Becomes zero immediately

Answer: C

22. Goods that can replace each other perfectly have Indifference Curves that are:
A. Convex
B. Straight lines
C. Circular
D. Vertical

Answer: B

23. Consumer preferences are called monotonic when the consumer prefers:
A. Less of every good
B. More of at least one good without having less of the other
C. Equal quantities only
D. Random combinations

Answer: B

24. Which of the following best defines a consumption bundle?
A. A consumer’s income
B. A combination of quantities of different goods
C. A production plan
D. A demand schedule

Answer: B

25. Which statement is FALSE?
A. Utility is subjective.
B. Marginal Utility may become negative.
C. Higher Indifference Curves represent higher satisfaction.
D. Two Indifference Curves can intersect.

Answer: D

26. A budget line represents:
A. Maximum income
B. Maximum utility
C. All combinations of two goods that exhaust the consumer’s income
D. Total expenditure of the government

Answer: C

27. The budget set includes:
A. Only bundles on the budget line
B. Only bundles above the budget line
C. All affordable bundles on or below the budget line
D. Only unaffordable bundles

Answer: C

28. The equation of the budget line is:
A. MU = Price
B. P₁X₁ + P₂X₂ = M
C. Demand = Supply
D. TU = MU

Answer: B

29. The slope of the budget line is equal to:
A. Income
B. Price of one good
C. Negative ratio of prices
D. Quantity demanded

Answer: C

30. If the consumer’s income increases while prices remain constant, the budget line will:
A. Rotate inward
B. Rotate outward
C. Shift parallel outward
D. Remain unchanged

Answer: C

31. If income decreases, the budget line will:
A. Shift outward
B. Shift inward parallel
C. Rotate upward
D. Become horizontal

Answer: B

32. When the price of Good X decreases, the budget line:
A. Shifts parallel
B. Rotates outward
C. Rotates inward
D. Disappears

Answer: B

33. If the price of Good X increases, the budget line becomes:
A. Flatter
B. Steeper
C. Horizontal
D. Vertical

Answer: B

34. Consumer equilibrium under the ordinal approach occurs where:
A. TU is zero
B. Budget line touches the highest attainable indifference curve
C. MU is maximum
D. Price is minimum

Answer: B

35. At consumer equilibrium:
A. MRS > Price Ratio
B. MRS < Price Ratio
C. MRS = Price Ratio
D. MRS = Income

Answer: C

36. Which condition is used in the cardinal approach?
A. MRS = Price Ratio
B. MUx/Px = MUy/Py
C. Demand = Supply
D. Price = Cost

Answer: B

37. Demand means:
A. Desire only
B. Desire supported by purchasing power
C. Income only
D. Production only

Answer: B

38. According to the Law of Demand, demand and price are:
A. Positively related
B. Unrelated
C. Inversely related
D. Always equal

Answer: C

39. A demand curve normally slopes:
A. Upward
B. Downward
C. Vertically
D. Horizontally

Answer: B

40. Which of the following causes movement along the demand curve?
A. Income
B. Taste
C. Price of the commodity
D. Population

Answer: C

41. Which factor causes a shift in the demand curve?
A. Change in own price
B. Change in consumer income
C. Quantity demanded
D. Market price only

Answer: B

42. For a normal good, an increase in income causes demand to:
A. Fall
B. Remain constant
C. Rise
D. Become zero

Answer: C

43. An inferior good is one whose demand:
A. Increases with income
B. Decreases with income
C. Never changes
D. Depends only on price

Answer: B

44. Tea and coffee are generally:
A. Complementary goods
B. Inferior goods
C. Substitute goods
D. Capital goods

Answer: C

45. Car and petrol are examples of:
A. Substitute goods
B. Complementary goods
C. Luxury goods
D. Inferior goods

Answer: B

46. Market demand is obtained by:
A. Multiplying individual demands
B. Dividing total demand
C. Adding individual demands
D. Subtracting individual demands

Answer: C

47. Price elasticity of demand measures:
A. Change in income
B. Responsiveness of demand to price changes
C. Utility of goods
D. Cost of production

Answer: B

48. If elasticity of demand is greater than 1, demand is said to be:
A. Perfectly inelastic
B. Inelastic
C. Elastic
D. Unitary elastic

Answer: C

49. Demand for essential commodities is generally:
A. Perfectly elastic
B. Elastic
C. Inelastic
D. Infinite

Answer: C

50. When elasticity of demand is equal to 1, demand is:
A. Perfectly elastic
B. Perfectly inelastic
C. Unitary elastic
D. Highly inelastic

Answer: C

Practice Challenge (Without Answers)

51. Which of the following causes the budget line to rotate?
A. Increase in income
B. Change in the price of one good
C. Increase in savings
D. Increase in population

52. Which good is most likely to have elastic demand?
A. Salt
B. Life-saving medicine
C. Luxury watch
D. Drinking water

53. A rightward shift of the demand curve indicates:
A. Decrease in demand
B. Increase in demand
C. Extension of demand
D. Contraction of demand

54. Which of the following is an example of a complementary good?
A. Butter and Jam
B. Pen and Ink
C. Tea and Coffee
D. Rice and Wheat

55. Which demand curve has elasticity equal to zero?
A. Horizontal demand curve
B. Vertical demand curve
C. Rectangular hyperbola
D. Linear demand curve

56. Which demand curve has infinite elasticity?
A. Vertical demand curve
B. Horizontal demand curve
C. Rectangular hyperbola
D. Downward-sloping demand curve

57. A rectangular hyperbola demand curve has elasticity equal to:
A. 0
B. 1
C. Greater than 1
D. Less than 1

58. The expenditure on a good remains unchanged when demand is:
A. Elastic
B. Inelastic
C. Unitary elastic
D. Perfectly inelastic

59. Which of the following is NOT a determinant of demand?
A. Consumer’s income
B. Prices of related goods
C. Technology of production
D. Consumer preferences

60. Which statement is correct?
A. Higher indifference curves indicate lower satisfaction.
B. Budget line shows unaffordable bundles.
C. Demand curve generally slopes downward.
D. Total utility always decreases.

Answer Key (51–60)

Assertion–Reason Questions

Directions:

Choose the correct option:
A. Both A and R are true and R is the correct explanation of A
B. Both A and R are true but R is not the correct explanation
C. A is true but R is false
D. A is false but R is true

1.

Assertion (A): Marginal utility decreases as consumption increases.
Reason (R): Each additional unit gives less extra satisfaction.

Answer: A

2.

A: Total utility is the sum of marginal utilities.
R: MU measures additional satisfaction from consumption.

Answer: A

3.

A: When MU becomes zero, TU is maximum.
R: After this point, MU becomes negative.

Answer: A

4.

A: Utility can be measured in exact numerical units.
R: Cardinal approach assumes measurable utility.

Answer: B

5.

A: Indifference curves never intersect.
R: It leads to contradictory levels of satisfaction.

Answer: A

6.

A: Higher indifference curves represent higher satisfaction.
R: More preferred combinations lie farther from origin.

Answer: A

7.

A: Budget line shifts when income changes.
R: Prices of goods remain constant in this case.

Answer: A

8.

A: Budget line rotates when price of a good changes.
R: Slope depends on ratio of prices.

Answer: A

9.

A: Consumer equilibrium occurs at highest attainable indifference curve.
R: Consumer tries to maximize satisfaction within budget.

Answer: A

10.

A: At equilibrium, MRS equals price ratio.
R: Consumer adjusts consumption to maximize utility.

Answer: A

11.

A: Demand curve slopes downward.
R: Higher price reduces quantity demanded.

Answer: A

12.

A: Movement along demand curve occurs due to price change.
R: Other factors remain constant.

Answer: A

13.

A: Shift in demand curve is caused by price change.
R: Shift occurs due to non-price factors.

Answer: D

14.

A: Normal goods show positive relation between income and demand.
R: Demand increases when income increases.

Answer: A

15.

A: Inferior goods increase in demand when income rises.
R: Consumers shift to better substitutes.

Answer: D

16.

A: Substitute goods move in same direction of price change.
R: Rise in price of one increases demand for the other.

Answer: C

17.

A: Complementary goods are consumed together.
R: Price rise of one reduces demand of other.

Answer: A

18.

A: Market demand is sum of individual demands.
R: It is derived by horizontal summation.

Answer: A

19.

A: Elastic demand means demand changes more than price.
R: Elasticity is greater than 1.

Answer: A

20.

A: Inelastic demand is highly responsive to price changes.
R: Elasticity is less than 1.

Answer: D

21.

A: Unit elastic demand means total expenditure remains constant.
R: Percentage change in price equals change in quantity.

Answer: A

22.

A: Essential goods usually have elastic demand.
R: They have many close substitutes.

Answer: D

23.

A: Luxury goods generally have elastic demand.
R: Consumers can postpone consumption.

Answer: A

24.

A: Demand increases when price of substitute rises.
R: Consumers switch to relatively cheaper good.

Answer: A

25.

A: Demand decreases when price of complementary good rises.
R: Goods are jointly consumed.

Answer: A

26.

Assertion (A): Budget line shows all combinations of goods that a consumer can afford.
Reason (R): It assumes full utilisation of income.

Answer: A

27.

A: Budget set includes all points below the budget line.
R: These combinations are affordable within income.

Answer: A

28.

A: Budget line shifts right when income increases.
R: Prices of goods remain unchanged.

Answer: A

29.

A: Budget line becomes steeper when price of one good rises.
R: Slope depends on ratio of prices.

Answer: A

30.

A: Consumer equilibrium ensures maximum satisfaction.
R: Consumer always tries to maximise utility.

Answer: A

31.

A: MU approach assumes utility is measurable.
R: Utility is expressed in utils.

Answer: A

32.

A: Indifference curves are upward sloping.
R: More of both goods increases satisfaction.

Answer: D

33.

A: Two indifference curves can intersect.
R: They represent same satisfaction level.

Answer: D

34.

A: MRS decreases along indifference curve.
R: Consumer is willing to sacrifice less of one good for another.

Answer: A

35.

A: Law of demand shows inverse relation between price and demand.
R: Higher price reduces purchasing power.

Answer: A

36.

A: Movement along demand curve is due to income change.
R: Only price of commodity changes in movement.

Answer: D

37.

A: Shift in demand curve occurs due to change in income.
R: Income affects demand at all price levels.

Answer: A

38.

A: Substitute goods have positive cross-price relation.
R: Rise in price of one increases demand for other.

Answer: A

39.

A: Complementary goods have negative cross-price relation.
R: They are consumed together.

Answer: A

40.

A: Demand for inferior goods rises with income.
R: Consumers prefer better quality goods.

Answer: D

41.

A: Market demand curve is flatter than individual demand curves.
R: It is horizontal summation.

Answer: A

42.

A: Elasticity of demand measures responsiveness to price change.
R: It uses percentage change method.

Answer: A

43.

A: If elasticity is greater than 1, demand is inelastic.
R: Quantity changes less than price.

Answer: D

44.

A: If elasticity equals 1, total expenditure remains unchanged.
R: Price and quantity change in same proportion.

Answer: A

45.

A: Vertical demand curve shows perfectly inelastic demand.
R: Quantity does not change with price.

Answer: A

46.

A: Horizontal demand curve shows perfectly elastic demand.
R: Consumers buy unlimited quantity at a fixed price.

Answer: A

47.

A: Demand for necessities is usually elastic.
R: They have many substitutes.

Answer: D

48.

A: Demand for luxuries is usually elastic.
R: Consumers can postpone purchase.

Answer: A

49.

A: Expenditure depends on elasticity of demand.
R: Price change affects revenue.

Answer: A

50.

A: Elastic demand means expenditure increases when price rises.
R: Quantity falls more than proportionate increase in price.

Answer: D

Fill in the blanks:

1. Utility means __________ obtained from consumption.
Answer: satisfaction

2. Marginal Utility is the utility from __________ unit.
Answer: additional / one extra

3. Total Utility is the sum of __________ utilities.
Answer: marginal

4. When MU is zero, TU is __________.
Answer: maximum

5. Law of Diminishing Marginal Utility states MU __________ as consumption increases.
Answer: decreases

6. Utility is a __________ concept.
Answer: subjective

7. Cardinal utility approach assumes utility can be measured in __________.
Answer: numbers (utils)

8. Ordinal utility approach ranks preferences in __________ order.
Answer: preference

9. Indifference curve shows equal __________ levels.
Answer: satisfaction

10. Indifference curves are __________ to the origin.
Answer: convex

11. MRS stands for Marginal Rate of __________.
Answer: Substitution

12. MRS __________ along an indifference curve.
Answer: decreases

13. Higher indifference curve indicates higher __________.
Answer: satisfaction

14. Budget line shows all combinations that exhaust __________.
Answer: income

15. Budget line equation is P₁X₁ + P₂X₂ = __________.
Answer: M (income)

16. Budget set includes all affordable __________.
Answer: bundles

17. Slope of budget line is negative of price __________.
Answer: ratio

18. Consumer equilibrium occurs at maximum __________.
Answer: satisfaction

19. In equilibrium, MRS = __________ ratio.
Answer: price

20. Demand refers to willingness and __________ to buy.
Answer: ability

21. Law of Demand shows __________ relation between price and demand.
Answer: inverse

22. Demand curve usually slopes __________.
Answer: downward

23. Extension of demand happens when price __________.
Answer: falls

24. Contraction of demand happens when price __________.
Answer: rises

25. Change in income causes a __________ in demand curve.
Answer: shift

26.

A budget line shows all combinations of two goods that fully exhaust the consumer’s __________.
Answer: income

27.

If income increases, the budget line shifts __________.
Answer: outward / rightward (parallel shift)

28.

If price of a good increases, the budget line becomes __________.
Answer: steeper

29.

Consumer equilibrium is achieved when the consumer gets maximum __________.
Answer: satisfaction

30.

MU approach of equilibrium is MU = __________.
Answer: price

31.

In ordinal approach, equilibrium condition is MRS = __________ ratio.
Answer: price

32.

Demand is effective only when desire is backed by __________ power.
Answer: purchasing

33.

Law of demand shows a __________ relationship between price and quantity demanded.
Answer: negative / inverse

34.

A demand curve normally slopes __________.
Answer: downward

35.

Movement along demand curve is caused by change in __________.
Answer: price

36.

Shift in demand curve is caused by factors other than __________.
Answer: price

37.

Increase in income shifts demand curve for normal goods to the __________.
Answer: right

38.

Decrease in income shifts demand curve for normal goods to the __________.
Answer: left

39.

Goods consumed together are called __________ goods.
Answer: complementary

40.

Tea and coffee are examples of __________ goods.
Answer: substitute

41.

Car and petrol are examples of __________ goods.
Answer: complementary

42.

Market demand is obtained by __________ individual demands.
Answer: adding

43.

Elasticity of demand measures responsiveness of demand to change in __________.
Answer: price

44.

If elasticity is greater than 1, demand is __________.
Answer: elastic

45.

If elasticity is less than 1, demand is __________.
Answer: inelastic

46.

If elasticity equals 1, demand is __________ elastic.
Answer: unitary

47.

Demand for necessities is usually __________ elastic.
Answer: inelastic

48.

Demand for luxury goods is usually __________ elastic.
Answer: elastic

49.

A vertical demand curve shows perfectly __________ demand.
Answer: inelastic

50.

A horizontal demand curve shows perfectly __________ demand.
Answer: elastic

True / False Questions

1.

Utility means satisfaction from consumption.
Answer: True

2.

Marginal Utility is always constant.
Answer: False

3.

Total Utility is sum of marginal utilities.
Answer: True

4.

When MU becomes zero, TU is minimum.
Answer: False

5.

Law of diminishing marginal utility states MU increases with consumption.
Answer: False

6.

Utility is subjective in nature.
Answer: True

7.

Cardinal approach assumes utility cannot be measured.
Answer: False

8.

Ordinal approach ranks preferences.
Answer: True

9.

Indifference curve shows equal satisfaction.
Answer: True

10.

Indifference curves can intersect.
Answer: False

11.

Higher indifference curve shows higher satisfaction.
Answer: True

12.

MRS increases along indifference curve.
Answer: False

13.

Budget line shows affordable combinations.
Answer: True

14.

Budget set includes unaffordable bundles only.
Answer: False

15.

Budget line shifts when income changes.
Answer: True

16.

Budget line rotates when price changes.
Answer: True

17.

Consumer equilibrium means maximum satisfaction.
Answer: True

18.

At equilibrium, MRS equals price ratio.
Answer: True

19.

Demand means desire only.
Answer: False

20.

Demand is backed by purchasing power.
Answer: True

21.

Law of demand shows positive relation between price and demand.
Answer: False

22.

Demand curve slopes downward.
Answer: True

23.

Movement along demand curve is due to income change.
Answer: False

24.

Shift in demand curve is caused by non-price factors.
Answer: True

25.

Increase in income increases demand for normal goods.
Answer: True

26.

Budget line shows only those combinations that are affordable within income.
Answer: True

27.

Budget set includes only combinations above the budget line.
Answer: False

28.

Increase in income shifts budget line outward.
Answer: True

29.

Increase in price of a good rotates budget line.
Answer: True

30.

Consumer equilibrium ensures minimum satisfaction.
Answer: False

31.

Consumer tries to maximize utility.
Answer: True

32.

MU = Price condition is used in ordinal approach.
Answer: False

33.

MRS = Price ratio is equilibrium condition in ordinal approach.
Answer: True

34.

Demand is only desire without purchasing power.
Answer: False

35.

Law of demand shows inverse relationship between price and demand.
Answer: True

36.

Demand curve slopes upward.
Answer: False

37.

Movement along demand curve happens due to change in price.
Answer: True

38.

Shift in demand curve is caused by change in income.
Answer: True

39.

Normal goods increase in demand when income rises.
Answer: True

40.

Inferior goods increase in demand when income rises.
Answer: False

41.

Substitute goods move demand in same direction as price of related good.
Answer: True

42.

Complementary goods are consumed independently.
Answer: False

43.

Market demand is sum of individual demands.
Answer: True

44.

Elasticity of demand measures response of demand to price change.
Answer: True

45.

If elasticity > 1, demand is inelastic.
Answer: False

46.

If elasticity < 1, demand is inelastic.
Answer: True

47.

Unitary elastic demand means total expenditure changes.
Answer: False

48.

Demand for necessities is usually inelastic.
Answer: True

49.

Demand for luxury goods is usually elastic.
Answer: True

50.

Vertical demand curve represents perfectly elastic demand.
Answer: False

Match the Following

Match Column A with Column B

Column A	Column B
1. Utility	A. Ratio of prices
2. Marginal Utility	B. Satisfaction
3. Total Utility	C. Additional satisfaction
4. Indifference Curve	D. Sum of MU
5. Budget Line	E. Equal satisfaction combinations
6. MRS	F. Full income spending line
7. Law of Demand	G. Inverse relation
8. Normal Goods	H. Demand increases with income
9. Inferior Goods	I. Demand decreases with income
10. Elasticity of Demand	J. Responsiveness to price

Answers

1–B
2–C
3–D
4–E
5–F
6–A
7–G
8–H
9–I
10–J

One-Word Answer Questions

(Answer in one word)

1. Satisfaction from consumption:
→ Utility

2. Additional satisfaction:
→ Marginal Utility

3. Total satisfaction:
→ Total Utility

4. Curve showing equal satisfaction:
→ Indifference Curve

5. Rate of substitution:
→ MRS

6. Income line:
→ Budget Line

7. Demand backed by purchasing power:
→ Demand

8. Good with rising demand when income rises:
→ Normal good

9. Good with falling demand when income rises:
→ Inferior good

10. Responsiveness of demand to price:
→ Elasticity

Case Study-Based Questions (CBSE Competency Type)

Case 1

A consumer buys two goods X and Y. When the price of X falls, she increases its consumption and reduces consumption of Y. She remains on the same level of satisfaction.

Questions:

1. What concept is shown here?
→ Substitution effect

2. What happens to demand of X when price falls?
→ Increases

3. What type of relationship exists between price and demand?
→ Inverse

4. Which curve represents same satisfaction levels?
→ Indifference curve

Case 2

A consumer has a fixed income. When price of one good increases, she reduces its consumption and shifts to another good.

Questions:

1. What line represents her budget?
→ Budget line

2. What happens when income is fixed?
→ Budget line rotates with price change

3. Name the goods likely involved.
→ Substitutes

4. What principle explains her behavior?
→ Consumer equilibrium/utility maximization

Case 3

A rise in income increases demand for milk but decreases demand for coarse cereals.

Questions:

1. Milk is a ______ good.
→ Normal good

2. Coarse cereals are ______ goods.
→ Inferior goods

3. What happens to demand curve of milk?
→ Shifts rightward

4. What happens to demand curve of inferior goods?
→ Shifts leftward

Numericals (Basic CBSE Type)

Q1

Price = ₹10 → Demand = 20 units
Price = ₹12 → Demand = 16 units

Find elasticity of demand.

Solution:

% change in Q = (16−20)/20 × 100 = −20%
% change in P = (12−10)/10 × 100 = 20%

Elasticity = 20/20 = 1

Q2

Price = ₹5 → Demand = 100
Price = ₹10 → Demand = 50

Elasticity?

%Q = −50%
%P = 100%

Elasticity = 50/100 = 0.5 (Inelastic)

Q3

Price increases but total expenditure remains same. Elasticity is:

→ Unitary Elastic (e = 1)

Diagram-Based Questions (Theory)

1. Demand Curve

Always downward sloping
Shows inverse relation

2. Budget Line

Straight line
Shows income constraint

3. Indifference Curve

Downward sloping
Convex to origin

Final Chapter Test (Board Pattern)

Section A (1 mark)

Define utility
What is demand?
What is budget line?
Define MRS
What is elasticity?

Section B (3 marks)

Explain law of demand
Differentiate normal and inferior goods
Explain substitutes and complements

Section C (5 marks)

Explain consumer equilibrium
Explain elasticity of demand with formula
Explain shifts in demand curve

SECTION A – VERY SHORT ANSWER (1 MARK)

1. Define utility.
→ Satisfaction from consumption of goods and services.

2. What is marginal utility?
→ Additional satisfaction from one extra unit.

3. What is demand?
→ Quantity a consumer is willing and able to buy at a given price.

4. What is budget line?
→ A line showing all combinations that exhaust income.

5. What is elasticity of demand?
→ Responsiveness of demand to change in price.

6. What is indifference curve?
→ Curve showing equal satisfaction combinations.

SECTION B – SHORT ANSWER (3 MARKS)

7. State law of diminishing marginal utility.
As consumption increases, marginal utility from each additional unit decreases.

8. Explain law of demand.
There is inverse relationship between price and demand, assuming other factors remain constant.

9. Differentiate between normal and inferior goods.

Normal goods: demand increases with income
Inferior goods: demand decreases with income

10. What is budget constraint?
A consumer cannot spend more than income; hence total expenditure must be ≤ income.

SECTION C – LONG ANSWER (5 MARKS)

11. Explain consumer equilibrium (ordinal approach)

Consumer is in equilibrium when:

Budget line is tangent to indifference curve
MRS = Price ratio

At this point, consumer cannot increase satisfaction further given income.

12. Explain factors affecting demand

Price of commodity
Income of consumer
Prices of related goods
Taste and preferences
Expectations

13. Explain shifts in demand curve

Demand curve shifts when non-price factors change:

Income increase → right shift (normal goods)
Income decrease → left shift
Substitute price increase → right shift
Complement price increase → left shift

14. Explain price elasticity of demand

Elasticity measures responsiveness of demand to price: $e_d = \frac{\% \text{ change in quantity}}{\% \text{ change in price}}$ ed=% change in price% change in quantity

Types:

Elastic (>1)
Inelastic (<1)
Unit elastic (=1)

SECTION D – NUMERICAL QUESTION

15. Calculate elasticity

Price increases from 20 to 25
Demand falls from 40 to 30

Solution:

%ΔQ = (30−40)/40 × 100 = −25%
%ΔP = (25−20)/20 × 100 = 25%

Elasticity = 25/25 = 1 (Unit Elastic)

SECTION E – HIGHER ORDER THINKING (HOTS)

16. Why does demand curve slope downward?

Because:

Law of diminishing marginal utility
Income effect
Substitution effect

17. Why are essential goods inelastic?

Because:

They have no substitutes
They are necessary for survival
Demand does not change much with price

📌 FINAL REVISION SHEET

✔ Utility = Satisfaction
✔ MU decreases with consumption
✔ TU max when MU = 0

✔ Budget line = full income spent
✔ Slope = -P1/P2

✔ Equilibrium = MRS = Price ratio

✔ Demand = price vs quantity relationship
✔ Law of demand = inverse relation

✔ Normal goods → income ↑ demand ↑
✔ Inferior goods → income ↑ demand ↓

✔ Elasticity >1 → elastic
✔ Elasticity <1 → inelastic
✔ Elasticity =1 → unitary