This chapter explores how individual consumers make choices about what goods to buy based on their preferences and income constraints.
Theory Of Consumer Behaviour – Formula & Equation Sheet
Essential formulas and equations from Introductory Microeconomics, tailored for Class 12 in Economics.
This one-pager compiles key formulas and equations from the Theory Of Consumer Behaviour chapter of Introductory Microeconomics. Ideal for exam prep, quick reference, and solving time-bound numerical problems accurately.
Key concepts & formulas
Essential formulas, key terms, and important concepts for quick reference and revision.
Formulas
Total Utility (TU) = MU1 + MU2 + ... + MUn
TU is the total utility derived from consuming n units of a commodity, where MU is the marginal utility of each unit. This formula shows how total satisfaction is accumulated from individual units consumed.
Marginal Utility (MU) = TU(n) - TU(n-1)
MU is the change in total utility when one additional unit is consumed. It helps understand how satisfaction changes with consumption of more units.
Budget Constraint: p1x1 + p2x2 ≤ M
This inequality represents the combination of goods that can be purchased given prices (p1, p2) and income (M). It describes consumer limitations based on budget.
Budget Line: p1x1 + p2x2 = M
This equation specifies all combinations of two goods that exhaust the consumer's income. The budget line delineates affordable from non-affordable bundles.
Marginal Rate of Substitution (MRS) = |∆x2 / ∆x1|
MRS measures the rate at which a consumer is willing to give up one good for another while maintaining the same utility level. It shows the trade-off between goods.
Demand Function: Qd = f(P)
This function expresses how quantity demanded (Qd) varies with price (P), illustrating the relationship between price changes and consumer demand.
Law of Demand: Qd ↑ as P ↓ and Qd ↓ as P ↑
This law states that there is an inverse relationship between price and quantity demanded, establishing a downward sloping demand curve.
Income Effect: ∆Q = eD × ∆I
Describes how changes in income (∆I) affect the quantity demanded (∆Q), where eD is the price elasticity of demand for income changes.
Price Elasticity of Demand (eD) = (% Change in Quantity Demanded) / (% Change in Price)
This formula quantifies how sensitive the quantity demanded is to a change in price, indicating demand responsiveness.
Linear Demand: Q = a - bP
This represents a linear demand curve where 'a' is the quantity demanded at a price of zero and 'b' is the slope of the curve that shows change in demand with change in price.
Equations
Marginal Utility of nth unit: MU_n = TU_n - TU_(n-1)
Relates marginal utility to total utility derived from consumption, indicating how utility changes with additional units.
Total Utility at n units: TU_n = MU_1 + MU_2 + ... + MU_n
Shows total utility is the sum of marginal utilities of all units consumed, demonstrating how satisfaction accumulates.
Slope of the Budget Line: Slope = -p1/p2
Indicates the trade-off rate between two goods on the budget line; essential to analyze consumer choices.
Demand Curve Equation: Qd = a - bP
Linear representation of demand where Qd is quantity demanded as a function of price P, indicating a direct relationship with slope 'b'.
Income Elasticity of Demand: (∆Q / Q) / (∆I / I)
Measures responsiveness of demand to changes in income, indicating whether a good is normal or inferior.
Cross Price Elasticity: (∆Qx / Qx) / (∆Py / Py)
Measures how quantity demanded of one good (x) changes in response to a price change of another good (y), indicating substitute or complement status.
Giffen Good Condition: ∆Q < 0 when ∆P > 0
Identifies rare goods where demand increases despite price increase, violating typical demand behavior.
Perfectly Inelastic Demand: ∆Q = 0
Describes a situation where quantity demanded does not change in response to price changes, representing necessities.
Perfectly Elastic Demand: Q = Q0
Describes a situation where quantity demanded can change infinitely with any price change, demonstrating extreme sensitivity.
Unitary Elastic Demand: eD = 1
Describes a scenario where the percentage change in quantity demanded is equal to the percentage change in price, crucial for optimal pricing strategies.
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