NCERT Book Class 12 Economics (Microeconomics) Chapter 2 Theory Of Consumer Behaviour

Chapter 2
Theor
Theoryy of
Consumer Behaviour
In this chapter, we will study the behaviour of an individual
consumer. The consumer has to decide how to spend her income
on different goods1. Economists call this the problem of choice.
Most naturally, any consumer will want to get a combination of
goods that gives her maximum satisfaction. What will be this ‘best’
combination? This depends on the likes of the consumer and what
the consumer can afford to buy. The ‘likes’ of the consumer are
also called ‘preferences’. And what the consumer can afford to buy,
depends on prices of the goods and the income of the consumer.
This chapter presents two different approaches that explain
consumer behaviour (i) Cardinal Utility Analysis and (ii) Ordinal
Utility Analysis.

Preliminary Notations and Assumptions
A consumer, in general, consumes many goods; but for simplicity,
we shall consider the consumer’s choice problem in a situation
where there are only two goods2: bananas and mangoes. Any
combination of the amount of the two goods will be called a
consumption bundle or, in short, a bundle. In general, we shall
use the variable x1 to denote the quantity of bananas and x2 to
denote the quantity of mangoes. x1 and x2 can be positive or zero.
(x1, x2) would mean the bundle consisting of x1 quantity of bananas
and x2 quantity of mangoes. For particular values of x1 and x2, (x1,
x2), would give us a particular bundle. For example, the bundle
(5,10) consists of 5 bananas and 10 mangoes; the bundle (10, 5)
consists of 10 bananas and 5 mangoes.

2.1 UTILITY
A consumer usually decides his demand for a commodity on the
basis of utility (or satisfaction) that he derives from it. What is
utility? Utility of a commodity is its want-satisfying capacity. The
more the need of a commodity or the stronger the desire to have it,
the greater is the utility derived from the commodity.
Utility is subjective. Different individuals can get different levels
of utility from the same commodity. For example, some one who

1
We shall use the term goods to mean goods as well as services.
2
The assumption that there are only two goods simplifies the analysis considerably and allows us
to understand some important concepts by using simple diagrams.