The theory of demand begins with the examination of the behavior of the consumer since the market demand is assumed to be the sum total of the demands of individual consumers.

The consumer is assumed to be rational. Given his income and the market prices of the various commodities, he plans the spending of his income so as to attain the highest possible satisfaction or utility. This is the anxiom of utility maximization. In the static theory, it is assumed that the consumer has full knowledge of all the available commodities, their prices and income. To attain this objective, the consumer must be able to compare the utility (satisfaction) of the various ‘baskets of foods’ which he can buy with his income.

These are two basic approaches to the problem of comparison of utilities, the cardinalist theory and the ordinalist theory. The cardinalist school postulated that utility is measurable perhaps in monetary units, by the amount of money the consumer is willing to sacrifice for another unit of a commodity. Others suggested the measurement of utility in subjective units, called units. The ordinalist school postulated that utility is not measurable, but is an ordinal magnitude. The consumer need not know in specific units the ability of various commodities to make his choice. It suffices for him to be able to rank the various ‘baskets of foods1 according to the satisfaction that each bundle gives him. He must be able to determine his order of preference among the different bundles of foods or livestock products.


The consumer can either buy x or retain his income Y. Under these conditions, the consumer is in equilibrium when the marginal utility of x is equated to its market price (Px). Symbolically, we have MUX = Px. If the marginal utility of x is greater than its price, the consumer can increase his welfare by purchasing more units of x. Similarly, if the marginal utility of x is less than its price, the consumer can increase his total satisfaction by cutting down the quantity of x and keeping more of his income unspent. Therefore he attains the maximization of his utility when MUx = Px. If there are more commodities, the condition for the equilibrium of the consumer is the equality of the ratios of the marginal utilities of the individual commodities to their prices.

MUx   = MUY  = …. = MUn

PX   PY    Pn


The utility derived from spending an additional unit of money must be the same for all commodities. If the consumer derives greater utility from any one commodity, he can increase his welfare by spending more on that commodity and less on the others, until the above equilibrium condition is fulfilled.

To define the equilibrium of the consumer (i.e. his choice of the bundle that maximizes his utility), we must introduce the concept of indifference curves and if their scope (the marginal rate of substitution) and the concept of the budget line. These are the basic tools of the indifference curve approach.


An indifference curve is the locus of points -particular combinations or bundles of goods – which yield the same utility (level of satisfaction) to the consumer, so that he is indifferent as to the particular combination he consumes. Symbolically, an indifference curve is given by the equation

f(X1, X2, ….Xn) = k where k is a constant.

An indifference map shows all the indifference curves which rank the preferences of the consumer. Combinations of goods situated in an indifference curve yield the same utility. Combinations of goods lying on a higher indifference curve yield higher level of satisfaction and are preferred. Combinations of goods on a lower indifference curve yield a lower utility. An indifference map may be derived by assigning to k every possible value.

The negative of the slope of an indifference curve at any one point is called the marginal rate of substitution of the two commodities, X and Y and is given by the slope of the tangent at that point.


The marginal rate of substitution (MRS) of x for Y is defined as the number of units of a commodity y that must be given up in exchange for an extra unit of commodity x so that the consumer maintains the same level of satisfaction.


An indifference curve has a negative slope, which denotes that if the quantity of one commodity (Y) decreases, the quantity of the other (x) must increase, if the consumer is to stay on the same level of satisfaction.
The further away from the origin an indifference curve lies, the higher the level of utility it denotes.
Indifference curves do not intersect. If they did, the point of their intersection would imply two different levels of satisfaction, which is not possible.
Indifference curves are convex to the origin. This assumption implies that the commodities can substitute one another, but are not perfect substitutes.
If the commodities are perfect substitutes, the indifference curves becomes a straight line with negative slope.

Perfect substitutes

If the commodities are complements, the indifference curve takes the shape of a right angle.

Complementary goods

In the first case, the equilibrium of the consumer may be a corner solution, i.e. a situation in which the consumer spends all his income on one commodity. This is sometimes called Monomania. (Not observed in the real world). In the case of complementary goods, the indifference curve analysis breaks down, since there is no possibility of substitution between the commodities.

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