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  • The theory of consumer’s behavior seeks to explain the determination of consumer’s equilibrium. Two famous approaches to consumer’s equilibrium are marginal utility analysis and indifference curve analysis.
  • The law of diminishing marginal utility states that as a consumer increases the consumption of a commodity, every successive unit of the commodity gives lesser and lesser satisfaction to the consumer i.e., marginal utility of the commodity falls.
  • The indifference curve theory which is an ordinal theory shows the household’s preference between alternative bundles of goods by means of indifference curves. A single curve joins all those combinations of goods which gives the household equal satisfaction or utility and between which the household is thus indifferent.
  • The household reaches equilibrium when for a given money income and given market price, it has reached the highest attainable level of satisfaction. At such a point, the budget line is tangent to the indifference curve. At the tangency point, the following condition is satisfied: MUx/Px=Muy/ Py = Muz/Pz.

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