What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

State the law of diminishing marginal utility.

As a consumer consumes more units of a good, the marginal (extra) utility from each additional unit tends to fall.

Why is an indifference curve convex to the origin?

Because of a diminishing marginal rate of substitution — as the consumer gets more of one good, she is willing to give up less and less of the other for it.

Why can two indifference curves never intersect?

Because each curve represents a different level of satisfaction; an intersection would imply one bundle gives two different satisfaction levels, which is contradictory.

What does the slope of the budget line represent?

The ratio of the prices of the two goods, \(\dfrac{p_1}{p_2}\), showing the market rate at which one good can be exchanged for the other.

Distinguish between a normal good and an inferior good.

Demand for a normal good rises with income; demand for an inferior good falls as income rises.

Differentiate between a movement along and a shift of the demand curve.

A change in the good's own price causes a movement along the curve; a change in income, tastes or prices of related goods shifts the whole curve.

How is price elasticity of demand calculated?

As the percentage change in quantity demanded divided by the percentage change in price, \(e_d=\dfrac{\%\,\Delta Q}{\%\,\Delta P}\).

What is the relationship between substitutes and a change in price?

A rise in the price of one good raises the demand for its substitute, since consumers switch to the cheaper alternative.

Why does the demand curve slope downward?

Because of the law of demand — at lower prices consumers buy more due to higher real purchasing power and substitution towards the cheaper good.

Theory of Consumer Behaviour

Q: When is a consumer in equilibrium under the indifference-curve approach?

Where the budget line is tangent to the highest attainable indifference curve, i.e. the MRS equals the price ratio.

Class 12 Economics · Introductory Microeconomics · Chapter 2

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Summary

This chapter explains how a rational consumer chooses the bundle of goods that gives maximum satisfaction within her budget. Two approaches are studied. The cardinal utility approach measures satisfaction in numbers (utils) and uses the law of diminishing marginal utility — as more of a good is consumed, the extra utility from each additional unit falls; a consumer is in equilibrium where the marginal utility per rupee is equal across goods. The ordinal utility approach ranks preferences using indifference curves, each showing bundles giving the same satisfaction. Indifference curves slope downward, are convex to the origin, and do not intersect; their slope is the marginal rate of substitution, the rate at which the consumer trades one good for another while staying equally satisfied. The budget line shows all bundles a consumer can just afford given prices and income; its slope is the ratio of prices. The consumer is in equilibrium where the budget line is tangent to the highest attainable indifference curve. From this, the demand curve is derived, showing how quantity demanded varies inversely with price (the law of demand). The chapter also covers the market demand curve, normal and inferior goods, substitutes and complements, movements along versus shifts of the demand curve, and price elasticity of demand, \(e_d = \dfrac{\%\,\Delta Q}{\%\,\Delta P}\), and its link to expenditure.

Key terms

Utility

The satisfaction a consumer derives from consuming a good or service.

Marginal rate of substitution

The amount of one good a consumer gives up to gain one more unit of another, staying equally satisfied.

Indifference curve

A curve showing all bundles of two goods that yield the same level of satisfaction.

Budget line

A line showing all combinations of two goods a consumer can just afford with given income and prices.

Law of demand

Other things equal, quantity demanded falls as price rises and rises as price falls.

Price elasticity of demand

The responsiveness of quantity demanded to a change in price, \(e_d=\dfrac{\%\,\Delta Q}{\%\,\Delta P}\).

Extra questions & answers

Try one from this chapter

The law of diminishing marginal utility states that as consumption of a good increases:

Flashcards & interactive practice