Marginal Rate of Substitution (MRS) : It is the rate at which a
consumeris willing to substitute good Y for good X.
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MRS
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Loss of Good Y
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or
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Y
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Gain of Good X
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X
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Indifference Curve : is a curve showing
different combination of twogoods, each combinations offering the same level of
satisfaction to the consumer.
Characteristics of IC
Indifference
curves are negatively sloped.
Indifference
curves are convex to the point of origin.
Indifference
curves never touch or intersect each other.
Higher
indifference curve represents higher level of satisfaction.
Consumer’s Equilibrium : It is a
situation where a consumer is spendinghis income in such a way that he is
getting maximum satisfaction.
Condition of Consumer’s
Equilibrium
Cardinal approach (Utility
Analysis) : According
to this approachutility can be measured. “Utils” is the unit of utility.
Condition
In case of one community
MUmMuxIf
MUm 1, MUx Px
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Px
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Where,
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MUm = Marginal utility of money
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MUx = Marginal utility of ‘x’, Px = Price of
‘x’
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(ii) In case of two commodity.
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MUx
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MUy
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MUm
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Px
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Py
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and MU must be decreasing
Ordinal approach
(Indifference Curve Analysis): According tothis approach utility can’t be
measured but can be expressed in