Summary

Utility and Cardinal vs. Ordinal Approach: Utility is the satisfaction from consuming a good. The cardinal approach (Marshall) assumes utility is measurable in utils; the ordinal approach (Hicks-Allen) only ranks preferences. NCERT follows the ordinal approach.

Indifference Curve (IC): An IC shows all combinations of two goods giving equal satisfaction. It slopes downward (more of one good requires less of the other) and is convex to the origin (diminishing marginal rate of substitution).

Marginal Rate of Substitution (MRS): The rate at which a consumer gives up good Y for one more unit of good X while staying on the same IC. $MRS_{XY} = \frac{\Delta Y}{\Delta X}$. It diminishes as X increases.

Budget Line: Shows all combinations of two goods a consumer can buy given income ($M$) and prices ($P_X, P_Y$). Equation: $P_X X + P_Y Y = M$. Slope = $-\frac{P_X}{P_Y}$.

Consumer’s Optimum: Achieved where the budget line is tangent to the highest attainable indifference curve. At this point: $MRS_{XY} = \frac{P_X}{P_Y}$.

Demand Curve Derivation: A good’s demand curve is derived by varying its price (holding income and other prices constant) and tracing the optimal quantity demanded. It slopes downward due to the substitution effect (good becomes relatively cheaper) and income effect (real income changes).

Substitution and Income Effects: For a normal good, both effects work in the same direction (price fall → quantity rises). For an inferior good, the income effect works opposite; if it outweighs the substitution effect, the good is a Giffen good (upward-sloping demand curve). …