Class | Subject | Book | Chapter | Session | Questions covered |
|---|---|---|---|---|---|
XII | Economics | Microeconomics (NCERT) | 2 – Theory of Consumer Behaviour | 2026-27 | 26 of 26 |
Chapter at a glance
Concept | Key point |
|---|---|
Budget set | All bundles the consumer can buy:  |
Budget line | Bundles costing exactly : ; slope    |
Monotonic preferences | A bundle with more of at least one good and no less of the other is preferred |
Indifference curve | Bundles giving equal satisfaction; downward sloping, convex (diminishing MRS) |
Consumer’s optimum | Budget line tangent to the highest indifference curve:  |
Demand | Law of demand – inverse relation between price and quantity demanded (substitution and income effects) |
Normal / inferior goods | Demand rises / falls with income |
Substitutes / complements | Demand rises / falls with price of the related good |
Market demand | Horizontal sum of individual demands |
Price elasticity | ; linear demand :    |
Elasticity and expenditure | Inelastic (): price rise raises expenditure; elastic (): price rise lowers expenditure; unitary: unchanged   |
Exercises
What do you mean by the budget set of a consumer?
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The budget set is the collection of all bundles of goods that the consumer can buy with her income at the prevailing market prices. For two goods with prices , and income , it is the set of bundles such that
The budget set is the set of all bundles the consumer can afford: p₁x₁ + p₂x₂ ≤ M.
What is budget line?
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The budget line is the line showing all bundles that cost exactly the consumer’s income:
Points on the line use up the whole income; points inside it cost less than income; points outside are unaffordable.
The budget line consists of all bundles whose cost exactly equals the consumer’s income: p₁x₁ + p₂x₂ = M.
Explain why the budget line is downward sloping.
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On the budget line the consumer spends her entire income. To consume one more unit of good 1, she must spend more, which is possible only by giving up units of good 2. So more of one good means less of the other – an inverse relation – and the line slopes downward with slope
which is the rate at which the market allows good 2 to be exchanged for good 1.
Because with a fixed income, buying more of one good requires buying less of the other; the slope –p₁/p₂ shows the amount of good 2 given up per extra unit of good 1.
A consumer wants to consume two goods. The prices of the two goods are ₹ 4 and ₹ 5 respectively. The consumer’s income is ₹ 20. (i) Write down the equation of the budget line. (ii) How much of good 1 can the consumer consume if she spends her entire income on that good? (iii) How much of good 2 can she consume if she spends her entire income on that good? (iv) What is the slope of the budget line?
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- .
- units.
- units.
- Slope .
- units.
- 4x₁ + 5x₂ = 20; (ii) 5 units; (iii) 4 units; (iv) slope = –4/5.
How does the budget line change if the consumer’s income increases to ₹ 40 but the prices remain unchanged?
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New budget line: . The intercepts become 10 (good 1) and 8 (good 2); the slope stays . So the budget line shifts outward, parallel to the original line.
It shifts outward parallel to itself: 4x₁ + 5x₂ = 40, with intercepts 10 and 8 and the same slope –4/5.
How does the budget line change if the price of good 2 decreases by a rupee but the price of good 1 and the consumer’s income remain unchanged?
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New price of good 2 = ₹ 4. New budget line: .
- Intercept on the good 1 axis stays at 5.
- Intercept on the good 2 axis rises from 4 to 5.
- Slope changes from to .
The budget line rotates outward (becomes steeper), pivoting at the horizontal intercept (5, 0).
The budget line pivots outward around the good-1 intercept (5, 0): 4x₁ + 4x₂ = 20, with the good-2 intercept rising from 4 to 5 and the slope becoming –1.
What happens to the budget set if both the prices as well as the income double?
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New budget line: , which simplifies to – the same as before. Intercepts and slope are unchanged, so the budget set remains unchanged.
It remains unchanged, since doubling prices and income gives the same budget line.
Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if she spends her entire income. The prices of the two goods are ₹ 6 and ₹ 8 respectively. How much is the consumer’s income?
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.
Income = ₹ 100.
Suppose a consumer wants to consume two goods which are available only in integer units. The two goods are equally priced at ₹ 10 and the consumer’s income is ₹ 40. (i) Write down all the bundles that are available to the consumer. (ii) Among the bundles that are available to the consumer, identify those which cost her exactly ₹ 40.
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Budget constraint: .
(i) Available bundles (15): (0,0), (0,1), (0,2), (0,3), (0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1), (4,0).
(ii) Bundles costing exactly ₹ 40 (): (0,4), (1,3), (2,2), (3,1), (4,0).
- All 15 integer bundles with x₁ + x₂ ≤ 4; (ii) (0,4), (1,3), (2,2), (3,1) and (4,0) cost exactly ₹ 40.
What do you mean by ‘monotonic preferences’?
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A consumer’s preferences are monotonic if, between any two bundles, she prefers the bundle that has more of at least one good and no less of the other good. E.g. (5, 6) is preferred to (5, 5), and (6, 6) to (5, 5).
Preferences are monotonic if a bundle with more of at least one good and no less of the other is always preferred.
If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)?
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No. The bundle (10, 8) has more of both goods than (8, 6). With monotonic preferences she must strictly prefer (10, 8) to (8, 6), so she cannot be indifferent between them.
No – (10, 8) has more of both goods, so she must prefer it to (8, 6).
Suppose a consumer’s preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?
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- (10, 10) vs (10, 9): same good 1, more good 2 → (10, 10) is preferred.
- (10, 9) vs (9, 9): more good 1, same good 2 → (10, 9) is preferred.
Ranking: (10, 10) ≻ (10, 9) ≻ (9, 9).
(10, 10) is preferred to (10, 9), which is preferred to (9, 9).
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
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No. The bundle (6, 6) has more of good 1 and the same amount of good 2 as (5, 6). With monotonic preferences, (6, 6) should be strictly preferred. Since your friend is indifferent, the preferences are not monotonic.
No – (6, 6) has more of good 1 and the same of good 2, so monotonic preferences would require preferring it.
Suppose there are two consumers in the market for a good and their demand functions are as follows: d1(p) = 20 – p for any price less than or equal to 20, and d1(p) = 0 at any price greater than 20. d2(p) = 30 – 2p for any price less than or equal to 15 and d2(p) = 0 at any price greater than 15. Find out the market demand function.
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Market demand is the horizontal sum :
Market demand = 50 – 3p for p ≤ 15; 20 – p for 15 < p ≤ 20; and 0 for p > 20.
Suppose there are 20 consumers for a good and they have identical demand functions: d(p) = 10 – 3p for any price less than or equal to 10/3 and d(p) = 0 at any price greater than 10/3. What is the market demand function?
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Market demand = 200 – 60p for p ≤ 10/3, and 0 for p > 10/3.
Consider a market where there are just two consumers and suppose their demands for the good are given as follows (p, d1, d2): (1, 9, 24), (2, 8, 20), (3, 7, 18), (4, 6, 16), (5, 5, 14), (6, 4, 12). Calculate the market demand for the good.
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Price (₹) | d1 | d2 | Market demand (d1 + d2) |
|---|---|---|---|
1 | 9 | 24 | 33 |
2 | 8 | 20 | 28 |
3 | 7 | 18 | 25 |
4 | 6 | 16 | 22 |
5 | 5 | 14 | 19 |
6 | 4 | 12 | 16 |
Market demand: 33, 28, 25, 22, 19 and 16 units at prices ₹ 1 to ₹ 6.
What do you mean by a normal good?
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A normal good is a good whose demand increases when the consumer’s income increases (and decreases when income falls), other things remaining the same. E.g. clothes, fruits, milk for most consumers.
A normal good is one whose demand rises with an increase in income.
What do you mean by an ‘inferior good’? Give some examples.
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An inferior good is a good whose demand decreases when the consumer’s income increases, other things remaining the same. As income rises, consumers shift to better substitutes. Examples: coarse cereals (jowar, bajra), coarse cloth, low-quality food items. (A good may be normal at low incomes and inferior at higher incomes.)
An inferior good’s demand falls as income rises – e.g. coarse grains and coarse cloth.
What do you mean by substitutes? Give examples of two goods which are substitutes of each other.
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Substitutes are goods that can be used in place of each other to satisfy a want. The demand for a good rises when the price of its substitute rises. Examples: tea and coffee; Pepsi and Coca-Cola; butter and margarine.
Substitutes are goods used in place of each other, so demand for one rises when the other’s price rises – e.g. tea and coffee.
What do you mean by complements? Give examples of two goods which are complements of each other.
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Complements are goods that are used together to satisfy a want. The demand for a good falls when the price of its complement rises. Examples: tea and sugar; car and petrol; shoes and socks; pen and ink.
Complements are goods used together, so demand for one falls when the other’s price rises – e.g. tea and sugar.
Explain price elasticity of demand.
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Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is the percentage change in quantity demanded divided by the percentage change in price:
It is negative (law of demand) and a pure number. If , demand is elastic; if , inelastic; if , unitary elastic. It depends on the availability of substitutes, the nature of the good (necessity or luxury), the share of income spent on it, and the time period.
Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, measuring how responsive demand is to price.
Consider the demand for a good. At price ₹ 4, the demand for the good is 25 units. Suppose price of the good increases to ₹ 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.
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Demand is inelastic.
e_D = –0.8 (inelastic).
Consider the demand curve D(p) = 10 – 3p. What is the elasticity at price 5/3?
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At : .
Demand is unitary elastic at this price.
e_D = –1 (unitary elastic).
Suppose the price elasticity of demand for a good is – 0.2. If there is a 5 % increase in the price of the good, by what percentage will the demand for the good go down?
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.
Demand falls by 1 %.
Demand falls by 1 %.
Suppose the price elasticity of demand for a good is – 0.2. How will the expenditure on the good be affected if there is a 10 % increase in the price of the good?
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Demand is inelastic (), so expenditure rises when price rises.
Quantity falls by . New expenditure times the old, so expenditure rises by about 7.8 %.
Expenditure increases (by about 7.8 %), because demand is inelastic.
Suppose there was a 4 % decrease in the price of a good, and as a result, the expenditure on the good increased by 2 %. What can you say about the elasticity of demand?
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A fall in price led to a rise in expenditure, which happens only when demand is elastic ().
Computing: , so quantity rises by 6.25 %. .
Demand is elastic (|e_D| > 1, about 1.56), since a fall in price increased total expenditure.
Topic checklist
- ☒ Budget set and budget line, and changes in it (Q 1–9)
- ☒ Monotonic preferences (Q 10–13)
- ☒ Market demand (Q 14–16)
- ☒ Normal, inferior goods; substitutes, complements (Q 17–20)
- ☒ Price elasticity and expenditure (Q 21–26)