Theory of Consumer Behaviour Class 11: Utility, Indifference Curves, Demand and Elasticity

What Theory of Consumer Behaviour is about

Weightage: This chapter is part of Unit 5, Consumer's Equilibrium and Demand, which carries 14 of the 80 theory marks in the school annual exam.Source: CBSE Economics (030) syllabus 2026-27, Class XI course structure, Unit 5 Consumer's Equilibrium and Demand

Key concepts

Utility: total and marginal utility; law of diminishing marginal utility

NCERT section 2.1

Utility is the want-satisfying power of a good. In cardinal analysis it is measured in units called utils.

• Total utility (TU): total satisfaction from consuming a given quantity.
• Marginal utility (MU): change in TU from one more unit: $M{U}_n=T{U}_n-T{U}_{n-1}$; TU = sum of MUs.

Law of diminishing marginal utility: as more units of a good are consumed (other things constant), the MU from each additional unit falls.

Units	TU (utils)	MU (utils)
1	10	10
2	18	8
3	24	6
4	28	4
5	30	2
6	30	0
7	28	-2

TU-MU relation: while MU is positive, TU rises; when MU = 0, TU is at its maximum (6th unit); when MU is negative, TU falls.

Worked example

From the table, at which unit is TU maximum, and what is MU there?

Try it first, then show the solutionSolution

1. TU stops rising at 30 utils (5th and 6th units)
2. MU of the 6th unit = 30 − 30 = 0

Answer: TU is maximum (30 utils) where MU = 0, at the 6th unit; after that MU is negative.

Consumer equilibrium by marginal utility analysis

NCERT section 2.1.1

A consumer is in equilibrium when she gets maximum satisfaction from her given income at given prices and has no reason to change her purchases.

One commodity: buy up to the point where MU (in ₹) = Price (or MU in utils ÷ MU of a rupee = price). If MU > P, buy more; if MU < P, buy less.

Two commodities (law of equi-marginal utility): spend income so that

$\frac{M{U}_x}{P_x}=\frac{M{U}_y}{P_y}=M{U}_m$

and the whole income is spent. If MUx/Px > MUy/Py, a rupee gives more satisfaction in X, so the consumer shifts spending to X until the ratios become equal (diminishing MU makes this happen).

Two goods with Px = ₹4, Py = ₹2 and income ₹20:

Units	MUx	MUx ÷ Px	MUy	MUy ÷ Py
1	20	5	12	6
2	16	4	10	5
3	12	3	8	4
4	8	2	6	3
5	4	1	4	2
6	-	-	2	1

The ratios are equal (= 3) at x = 3 and y = 4, and spending = 4 × 3 + 2 × 4 = ₹20: equilibrium.

Worked example

The MU (in ₹) of successive cups of coffee is 50, 40, 30, 20, 10. The price is ₹30. How many cups will a rational consumer buy?

Try it first, then show the solutionSolution

1. Buy while MU ≥ price
2. MU of cups 1-3 (50, 40, 30) ≥ 30; the 4th cup gives only 20 < 30

Answer: 3 cups, where MU = price = ₹30.

Budget set and budget line

NCERT section 2.2

The budget set is the set of all bundles (x₁, x₂) the consumer can buy with income M at prices p₁ and p₂:

$p_1{x}_1+p_2{x}_2\le M$

The budget line shows bundles that cost exactly her income: $p_1{x}_1+p_2{x}_2=M$.

• Intercepts: M/p₁ on the x₁-axis and M/p₂ on the x₂-axis.
• Slope = −p₁/p₂: the rate at which the market lets her exchange good 2 for good 1 (the price ratio).

With M = ₹120, p₁ = ₹6, p₂ = ₹4: the line runs from (20, 0) to (0, 30); slope = −1.5. Bundle (10, 15) costs ₹120 (on the line); (8, 12) costs ₹96 (inside, affordable with money left); (12, 15) costs ₹132 (outside, not affordable).

Changes in the budget set:

• Income rises (prices same): parallel outward shift (slope unchanged). Income falls: parallel inward shift.
• Price of good 1 falls (income and p₂ same): the line rotates outward about the x₂ intercept (x₁ intercept increases; it becomes flatter). A rise rotates it inward.
• Both prices and income change by the same proportion: no change.

Worked example

With M = ₹120, p₁ = ₹6 and p₂ = ₹4, what happens to the budget line if p₁ falls to ₹4?

Try it first, then show the solutionSolution

1. x₂ intercept stays 120 ÷ 4 = 30
2. x₁ intercept rises from 20 to 120 ÷ 4 = 30
3. Slope changes from −1.5 to −1

Answer: The line rotates outward about (0, 30) and becomes flatter.

Preferences, indifference curves and MRS

NCERT section 2.1.2

In ordinal analysis the consumer only ranks bundles. An indifference curve (IC) joins all bundles that give her the same satisfaction. A set of ICs is an indifference map; a higher IC shows a higher level of satisfaction.

Monotonic preferences: a bundle with more of at least one good and no less of the other is preferred. So a higher IC is better.

Marginal rate of substitution (MRS): the amount of good 2 the consumer is willing to give up for one more unit of good 1, staying on the same IC: MRS = Δx₂ ÷ Δx₁ (absolute). MRS diminishes as she gets more of good 1 (it becomes less valuable to her relative to good 2).

Bundle	Good 1 (x₁)	Good 2 (x₂)	MRS (x₂ given up per extra x₁)
A	1	12	-
B	2	8	4
C	3	5	3
D	4	3	2
E	5	2	1

Properties of ICs:
1. Slope downward (with monotonic preferences, more of one good must be offset by less of the other).
2. Convex to the origin (diminishing MRS).
3. Never intersect (an intersection would make two different satisfaction levels equal).
4. Higher IC = higher satisfaction.

For perfect substitutes, MRS is constant and the IC is a straight line.

Worked example

Explain why two indifference curves cannot cross.

Try it first, then show the solutionSolution

1. Suppose IC₁ and IC₂ cross at point A
2. Take B on IC₁ and C on IC₂ where C has more of both goods than B
3. A ~ B (same IC₁) and A ~ C (same IC₂), so B ~ C
4. But C has more of both goods, so with monotonic preferences C is preferred to B: a contradiction

Answer: Because it would mean a bundle with more of both goods gives the same satisfaction, which contradicts monotonic preferences.

Consumer equilibrium by indifference curve analysis

NCERT section 2.3

The consumer chooses the best bundle in her budget set: the point where the budget line is tangent to the highest attainable IC.

Conditions:
1. MRS = p₁/p₂: the rate at which she is willing to substitute equals the rate at which the market lets her substitute.
2. MRS must be diminishing (the IC is convex at that point), so the tangency is a maximum.

If MRS > p₁/p₂, she values good 1 more than the market price ratio, so she buys more of good 1 (moving down the budget line) until MRS falls to the price ratio. If MRS < p₁/p₂, she buys less of good 1.

Points on lower ICs are affordable but give less satisfaction; points on higher ICs are not affordable.

Worked example

Suppose at the bundle a consumer is buying, MRS = 3 and p₁/p₂ = 2. Is she in equilibrium? What will she do?

Try it first, then show the solutionSolution

1. She is willing to give 3 units of good 2 for one unit of good 1, but the market asks only 2
2. Buying more of good 1 raises satisfaction; as she does, MRS falls

Answer: Not in equilibrium; she will buy more of good 1 and less of good 2 until MRS = 2.

Demand, its determinants, law of demand and market demand

NCERT section 2.4 and 2.5

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

Demand function: $q=d(p,p_r,M,T)$: own price, prices of related goods, income, tastes and preferences (also expectations, population for market demand).

Law of demand: other things remaining the same, quantity demanded rises when price falls and falls when price rises: the demand curve slopes downward. Reasons: diminishing marginal utility; substitution effect (the good becomes relatively cheaper); income effect (real income rises when price falls).

Normal and inferior goods: demand for a normal good rises with income; for an inferior good (coarse grain, low-quality cloth) it falls as income rises.

Related goods: substitutes (tea and coffee): rise in the price of one raises demand for the other. Complements (tea and sugar; car and petrol): rise in the price of one reduces demand for the other.

Movement vs shift: a change in the good's own price causes a movement along the demand curve (extension or contraction). A change in any other determinant shifts the curve (increase: rightward; decrease: leftward).

Market demand is the horizontal sum of individual demands at each price:

Price (₹)	Consumer A	Consumer B	Consumer C	Market demand
10	2	0	1	3
8	4	1	2	7
6	6	3	4	13
4	8	5	6	19
2	10	7	9	26

Worked example

Show the effect on the demand curve for coffee of (a) a fall in the price of coffee; (b) a rise in the price of tea; (c) a rise in income if coffee is normal; (d) a rise in the price of sugar.

Try it first, then show the solutionSolution

1. (a) Own price: movement down along the curve (extension)
2. (b) Tea is a substitute: demand for coffee rises: rightward shift
3. (c) Normal good: rightward shift
4. (d) Sugar is a complement: demand for coffee falls: leftward shift

Answer: (a) Movement along; (b) and (c) rightward shift; (d) leftward shift.

Price elasticity of demand: percentage method and factors

NCERT section 2.6

Price elasticity of demand (eD) measures how much quantity demanded responds to a change in price:

$e_D=\frac{\%\text{change in quantity demanded}}{\%\text{change in price}}=\frac{\Delta Q}{\Delta P}\times \frac{P}{Q}$

It is negative (price and quantity move in opposite directions); we usually quote its absolute value.

Value	Name	Example
eD = 0	Perfectly inelastic (vertical demand curve)	Life-saving drug in an emergency
0 < eD < 1	Inelastic	Salt, rice
eD = 1	Unitary elastic (rectangular hyperbola)
eD > 1	Elastic	Restaurant meals, branded clothes
eD = ∞	Perfectly elastic (horizontal)

On a linear demand curve q = a − bp, eD = bp ÷ (a − bp): it is 0 where the curve meets the quantity axis, 1 at the midpoint (p = a ÷ 2b), ∞ where it meets the price axis. Geometrically, eD at a point = lower segment ÷ upper segment.

Factors affecting elasticity: nature of the good (necessities inelastic, luxuries elastic); availability of close substitutes (more substitutes, more elastic); also share of income spent, number of uses, habits, and time period (demand is more elastic in the long run).

Worked example

Suppose the price of a notebook rises from ₹40 to ₹50 and the quantity bought falls from 500 to 450. Find eD.

Try it first, then show the solutionSolution

1. % change in Q = (450 − 500) ÷ 500 × 100 = -10%
2. % change in P = (50 − 40) ÷ 40 × 100 = 25%
3. eD = 10 ÷ 25 = 0.4

Answer: eD = 0.4 (inelastic): buyers reduce purchases only a little when the price rises, as notebooks are a necessity for students.

Total expenditure method

NCERT section 2.6.3

Compare total expenditure (P × Q) before and after a price change:

• Elastic (eD > 1): price and total expenditure move in opposite directions.
• Inelastic (eD < 1): price and total expenditure move in the same direction.
• Unitary (eD = 1): total expenditure does not change.

Price (₹)	Quantity	Total expenditure (₹)	Elasticity
10	60	600	-
12	45	540	Elastic (price ↑, expenditure ↓)
14	40	560	Inelastic (price ↑, expenditure ↑)
16	35	560	Unitary (expenditure same)

This method tells you only whether eD is greater than, less than or equal to one, not its exact value.

Why it matters: a seller facing elastic demand can raise revenue by cutting price; with inelastic demand, by raising price. Governments tax goods with inelastic demand (fuel, tobacco) because sales fall little.

Worked example

When the price of a good rises from ₹10 to ₹12, quantity falls from 60 to 45. Use the total expenditure method.

Try it first, then show the solutionSolution

1. Expenditure at ₹10 = ₹600; at ₹12 = ₹540
2. Price up, expenditure down

Answer: Demand is elastic (eD > 1) in this price range.

Theory of Consumer Behaviour in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Price Elasticity of Demand
• Utility, Budget Line and Consumer Equilibrium

Theory of Consumer Behaviour: key facts

Marginal utility

MU_n = TU_n - TU_{n-1}

TU = ΣMU.

Equilibrium (one good)

MU_x\,(\text{in ₹}) = P_x

Or MU in utils ÷ MU of money = price.

Equilibrium (two goods)

\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU_m

And the whole income is spent.

Budget line

p_1x_1 + p_2x_2 = M

Intercepts M/p₁ and M/p₂; slope −p₁/p₂.

Marginal rate of substitution

MRS = \left|\frac{\Delta x_2}{\Delta x_1}\right|

Diminishes along an IC.

IC equilibrium

MRS = \frac{p_1}{p_2}

Tangency of budget line and highest IC.

Price elasticity (percentage method)

e_D = \frac{\%\Delta Q}{\%\Delta P} = \frac{\Delta Q}{\Delta P}\times\frac{P}{Q}

Quote the absolute value.

Elasticity on a linear demand curve

q = a - bp \Rightarrow e_D = \frac{bp}{a - bp}

Unit elastic at p = a/2b.

Total expenditure

TE = P \times Q

Opposite to price: elastic; same: inelastic; unchanged: unitary.

How the school exam asks Theory of Consumer Behaviour

The question patterns to expect, and the method that works for each.

Tricks to remember Theory of Consumer Behaviour

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Equilibrium conditions

  Cardinal: "MU per rupee equal everywhere"; Ordinal: "MRS meets price ratio, IC convex".

  Use it when: Both equilibrium approaches.

• Total expenditure rule

  Opposite = Elastic; Same = inelaStic (S for Same); No change = unitary.

  Use it when: Total expenditure method.

• Shift or move?

  "Own price moves, others shove."

  Use it when: Demand curve questions.

• Determinants of demand: "PIRTE"

  Price, Income, Related goods' prices, Tastes, Expectations.

  Use it when: Listing determinants.

Theory of Consumer Behaviour: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Theory of Consumer Behaviour

The slips examiners see most often, and what to write instead.

• ✗Mistake: Using the new value as the base in percentage change

  Mixing up old and new figures.

  Wrong working

  % ΔQ = (450 − 500) ÷ 450 × 100

  Right working

  % ΔQ = (450 − 500) ÷ 500 × 100 = −10%

  ✓Do this: Divide by the original price and quantity.

  Usually costs: 1 mark.

• ✗Mistake: Calling a change in own price a "shift"

  Any change in demand feels like a shift.

  ✓Do this: Own price → movement along the curve; other determinants → shift.

  Usually costs: 1 mark.

• ✗Mistake: Drawing a parallel shift when only one price changes

  Confusing income and price changes.

  ✓Do this: Income change: parallel shift. Change in one price: rotation about the other intercept.

  Usually costs: 1 mark in a diagram.

• ✗Mistake: Stating only MRS = p₁/p₂

  The second condition is forgotten.

  ✓Do this: Add that MRS must be diminishing at equilibrium (convex IC).

  Usually costs: 1 mark in a 4-6 mark answer.

• ✗Mistake: Concluding exact eD from the total expenditure method

  Students give a number.

  ✓Do this: The expenditure method only tells you >1, <1 or =1.

  Usually costs: ½-1 mark.

NCERT exercise guide: Theory of Consumer Behaviour

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Practice questions on Theory of Consumer Behaviour

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQExam level

   Indifference curves are convex to the origin because of:
   (a) increasing MRS
   (b) diminishing MRS
   (c) constant MRS
   (d) rising prices

   Hint

   Less willing to give up good 2.

   Answer

   (b) diminishing MRS

2. Q2 · 1 mark · MCQExam level

   A rise in the price of tea leads to a rightward shift in the demand curve for coffee. Tea and coffee are:
   (a) complements
   (b) substitutes
   (c) inferior goods
   (d) unrelated

   Hint

   One replaces the other.

   Answer

   (b) substitutes

3. Q3 · 1 mark · Very short answerExam level

   What is the elasticity of demand on a vertical demand curve?

   Hint

   No response to price.

   Answer

   Zero (perfectly inelastic).

4. Q4 · 3 marks · Short answerExam level

   Calculate MU from TU: 15, 27, 36, 42, 45, 45, 42. State where the law of diminishing marginal utility shows.

   Hint

   Differences.

   Answer

   MU: 15, 12, 9, 6, 3, 0, −3. MU falls with each unit from the start; TU is maximum (45) at the 5th-6th unit where MU = 0.

5. Q5 · 3 marks · Short answerHarder exam level

   A consumer has ₹60 to spend on two goods priced ₹5 and ₹3. Write the budget line, find the intercepts, and say what happens if income rises to ₹90.

   Hint

   Parallel shift.

   Answer

   5x₁ + 3x₂ = 60; intercepts 12 and 20; slope −5/3. With ₹90: intercepts 18 and 30; parallel outward shift.

6. Q6 · 3 marks · Short answerHarder exam level

   The price of a good falls from ₹20 to ₹16 and quantity rises from 100 to 130 units. Find eD and say whether demand is elastic.

   Hint

   Use original values.

   Answer

   % ΔQ = 30%; % ΔP = −20%; eD = 1.5 (elastic).

7. Q7 · 3 marks · Short answerHarder exam level

   Market demand: at prices ₹5, 4, 3, consumer P demands 2, 4, 6 and consumer Q demands 1, 3, 6. Find market demand and explain how the market demand curve is derived.

   Hint

   Add at each price.

   Answer

   Market demand: 3, 7, 12. It is the horizontal sum of individual demands at each price.

8. Q8 · 3 marks · Short answerHarder exam level

   Distinguish between a movement along a demand curve and a shift of the demand curve, with one cause of each.

   Hint

   Own price vs other factors.

   Answer

   Movement: change in quantity demanded due to a change in the good's own price (extension or contraction), other factors constant. Shift: change in demand at every price due to a change in another factor (income, related prices, tastes): rightward for increase, leftward for decrease.

9. Q9 · 3 marks · Short answerHarder exam level

   Explain any three factors affecting price elasticity of demand.

   Hint

   Nature, substitutes, share of income.

   Answer

   (1) Nature of good: necessities inelastic, luxuries elastic. (2) Availability of close substitutes: more substitutes, more elastic. (3) Share of income spent: a small share (salt) means inelastic demand (also time period, habits, number of uses).

10. Q10 · 4 marks · Short answerHarder exam level

    For the demand curve q = 60 − 3p, find eD at p = 5 and at p = 15, and the price of unit elasticity.

    Hint

    eD = bp ÷ (a − bp).

    Answer

    p = 5: q = 45; eD = 15 ÷ 45 = 0.33 (inelastic). p = 15: q = 15; eD = 45 ÷ 15 = 3 (elastic). Unit elastic at p = 60 ÷ 6 = 10.

11. Q11 · 4 marks · Long answerHarder exam level

    Explain the properties of indifference curves.

    Hint

    Four properties.

    Answer

    (1) Downward sloping: to keep satisfaction equal, more of one good means less of the other (monotonic preferences). (2) Convex to the origin: diminishing MRS. (3) Never intersect: otherwise a bundle with more of both goods would give equal satisfaction. (4) Higher IC shows higher satisfaction.

12. Q12 · 4 marks · Long answerHOTS / competency

    Suppose the government wants to raise revenue by taxing a good. Using elasticity, explain why it may choose petrol rather than restaurant meals, and one drawback of this choice.

    Hint

    Inelastic demand.

    Answer

    Petrol has inelastic demand (few substitutes, a necessity for transport), so a tax raises price but sales fall little and tax revenue rises. Restaurant meals have elastic demand (many substitutes), so sales would fall sharply. Drawback: taxing necessities burdens poorer households heavily and raises costs across the economy (transport), adding to inflation.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Define marginal utility.Show answer

   The change in total utility from consuming one more unit.

2. 2.Equilibrium condition for two goods (cardinal)?Show answer

   MUx/Px = MUy/Py = MU of money.

3. 3.Equation of the budget line?Show answer

   p₁x₁ + p₂x₂ = M.

4. 4.What is MRS?Show answer

   The amount of good 2 a consumer is willing to give up for one more unit of good 1 on the same IC.

5. 5.Give an example of complements.Show answer

   Car and petrol (also tea and sugar).

6. 6.What is eD at the midpoint of a linear demand curve?Show answer

   1.

7. 7.If price and total expenditure move in the same direction, demand is...?Show answer

   Inelastic.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you compute MU from TU and state the law of DMU?
• ☐Can you find equilibrium for two goods from MU schedules?
• ☐Can you write and draw a budget line and show income and price changes?
• ☐Can you explain MRS and why ICs are convex?
• ☐Can you state both conditions of IC equilibrium?
• ☐Can you separate movements along and shifts of the demand curve?
• ☐Can you derive market demand from individual demands?
• ☐Can you compute eD by the percentage method and interpret it?
• ☐Can you use the total expenditure method?
• ☐Can you list four factors affecting elasticity?

Theory of Consumer Behaviour: frequently asked questions