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Consumer’s Surplus = Total utility
[Actual price × Units of commodity]
– TU – [P × Q]
= 20 – [2 × 5] = 20 – 10 = 10
Total utility = 20
Actual price = 2
Quantity = 5

 Consumer surplus is 50

The concept of consumer’s surplus is associated with Marshall.

The consumer reaches equilibrium at the point where the budget line is tangent on the indifference curve.
T is the point of equilibrium as budget line AB is tangent on indifference curve IC₃ the upper IC which implies maximum possible level of satisfaction.

At equilibrium point, the slope of IC refers to MRS_xy and the slope of BL (Budget Line) refers to ratio of price of X to price of Y i.e. P_x / P_y . Therefore MRS_x,y = P_x / P_y.

(d) Agricultural goods

The choice is always constrained or limited by the Scarcity of our resources.

The chief exponent of the Cardinal utility approach was Marshall.

A consumer is in equilibrium when marginal utilities from two goods are Equal.

(d) Edgeworth

(a) Indifference Curves

(a) Unitary Elastic Demand

The Giffen goods are inferior goods which are an exception to the law of demand. When the price of an inferior good falls, the poor will buy less and vice versa.

In ordinary language desire and want mean the same thing. But in economics they have
different meanings. Wants are the basis for human behaviour to buy and consume goods.

Characteristics of Human Wants:

• Wants are unlimited: Human wants are countless in number and various in kinds. When one wants is satisfied another want crops up. Human wants multiply with the growth of civilization and development.
• Wants become habits: Wants become habits; for example, when a man starts reading newspaper in the morning, it becomes a habit. Same is the case with drinking tea or chewing pans.
• Wants are Satiable: Though we cannot satisfy all our wants, at the same time we can satisfy particular wants at a given time. When one feels hungry, he takes food and that want is satisfied.
• Wants are Alternative: There are alternative ways to satisfy a particular want eg. Idly, dosa or chappathi.
• Wants are Competitive: All our wants are not equally important. So, there is competition among wants. Hence, we have to choose more urgent wants than less urgent wants.
• Wants are Complementary: Sometimes, satisfaction of a particular want requires the use of more than one commodity. Example: Car and Petrol, Ink and Pen.
• Wants are Recurring: Some wants occur again and again. For example, if we feel hungry, we take food and satisfy our want. But after sometime, we again feel hungry and want food.

In case of relatively more elastic demand, the shape of the curve is Flatter

(a) Extension and contraction of demand

(b) Higher subsidy

Ordinal utility can be measured by Ranking.

The concept of elasticity of demand was introduced by Marshall

(a) TU_n -TU_n-1

(a) Ordinal approach

(a) Law of diminishing marginal utility

When marginal utility reaches zero, the total utility will be Maximum.

(b) Law of diminishing marginal utility

(d) Negatively sloped

1. Utility is the capacity of a commodity to satisfy human wants.
2. Utility cannot be cardinally measured, but can be ranked or compared or ordered by ordinal number such as I, II, III and so on.

The Basic Approaches to Consumer Behaviour:

1. Cardinal Utility Analysis
2. Ordinal Utility Analysis

The concept of consumer’s surplus is based on the law of diminishing marginal utility. Alfred Marshall defines consumer’s surplus as “The excess of price which a person would be willing to pay rather than go without the thing, over that which he actually does pay is the economic measure of this surplus satisfaction. This may be called a consumer’s surplus.

1. The changes in the quantity demanded for a commodity due to the change in its price alone are called “ Extension and Contraction of demand”.
2. Buying more at lower price and less at a higher price is known “ Extension and Contraction of Demand”.