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    Ordinal Utility Approach

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    Satya Achari - 78
    The document discusses the ordinal utility approach to consumer behavior. It introduces indifference curves, which represent combinations of two goods that provide equal satisfaction to the consumer. Indifference curves have specific properties: they slope downward, are convex, and do not intersect. The slope of the indifference curve represents the marginal rate of substitution (MRS), or the amount of one good a consumer is willing to give up for another. Consumers seek to maximize utility subject to their budget constraint. Equilibrium occurs where the MRS equals the slope of the budget line, meaning the consumer cannot increase satisfaction given prices and income.

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    Ordinal Utility Approach

    Uploaded by

    Satya Achari - 78
    195 views18 pages
    The document discusses the ordinal utility approach to consumer behavior. It introduces indifference curves, which represent combinations of two goods that provide equal satisfaction to the consumer. Indifference curves have specific properties: they slope downward, are convex, and do not intersect. The slope of the indifference curve represents the marginal rate of substitution (MRS), or the amount of one good a consumer is willing to give up for another. Consumers seek to maximize utility subject to their budget constraint. Equilibrium occurs where the MRS equals the slope of the budget line, meaning the consumer cannot increase satisfaction given prices and income.

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    The document discusses the ordinal utility approach to consumer behavior. It introduces indifference curves, which represent combinations of two goods that provide equal satisfaction to the consumer. Indifference curves have specific properties: they slope downward, are convex, and do not intersect. The slope of the indifference curve represents the marginal rate of substitution (MRS), or the amount of one good a consumer is willing to give up for another. Consumers seek to maximize utility subject to their budget constraint. Equilibrium occurs where the MRS equals the slope of the budget line, meaning the consumer cannot increase satisfaction given prices and income.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    195 views18 pages

    Ordinal Utility Approach

    Uploaded by

    Satya Achari - 78
    The document discusses the ordinal utility approach to consumer behavior. It introduces indifference curves, which represent combinations of two goods that provide equal satisfaction to the consumer. Indifference curves have specific properties: they slope downward, are convex, and do not intersect. The slope of the indifference curve represents the marginal rate of substitution (MRS), or the amount of one good a consumer is willing to give up for another. Consumers seek to maximize utility subject to their budget constraint. Equilibrium occurs where the MRS equals the slope of the budget line, meaning the consumer cannot increase satisfaction given prices and income.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    ORDINAL UTILITY

    APPROACH
    INTRODUCTION:

    • J.R. Hicks of the Oxford University and R.G.D. Allen of the London School of
    Economics.
    • preference approach to consumer behavior
    • X1 > X0 implies that the bundle X1 is preferred to the bundle X0 .
    • X1 = X0 implies that the bundle X1 is indifferent to the bundle X0 .
    INDIFFERENCE CURVE:

    An indifference curve is defined as the set of combination of two goods (X1


    and X2 ) which give the consumer same level of utility or satisfaction or
    which are equally preferred.
    CONTD…

    INDIFFERENCE SCHEDULE INDIFFERENCE CURVE


    ASSUMPTIONS:

    • The consumer acts rationally so as to maximise satisfaction.


    • There are two goods X and Y
    • The consumer possesses complete information about the prices of the goods in the
    market.
    • The prices of the two goods are given.
    • The consumer’s tastes, habits and income remain the same throughout the analysis.
    • He prefers more of X to less of Y or more of Y to less of X.
    PROPERTIES OF IC:

    1. They Slope Negatively or Slope Downwards from the Left to the Right
    2. They are Convex to the Origin of Axes:  Law of Diminishing Marginal Rate of
    Substitution. (The marginal rate of substitution of X for Y (MRS)xy is the amount of Y
    that will be given up for obtaining each additional unit of X)
    3. Every Indifference Curve to the right represents Higher Level of Satisfaction than
    that of the Proceeding One
    4. Indifference Curves can neither touch nor Intersect each other, so that one
    Indifference Curve Passes through only one Point on an Indifference Map
    SLOPE OF IC:

    The slope of the indifference curve is called the MRS which is the ratio of the marginal
    utilities of the two commodities. This is expressed as

    MRS x,y = – ΔY /ΔX = MUx/MUy


    MARGINAL RATE OF SUBSTITUTION (MRS):

    The marginal rate of substitution of X for Y (MRS)xy is the amount of Y that will be given
    up for obtaining each additional unit of X. 
    DIMINISHING MRS:

    as the consumer moves


    downwards along the
    curve, he possesses
    additional units of X, and
    gives up lesser and lesser
    units of Y, i.e.,
    MRSXY diminishes.
    • If the marginal rate of substitution is increasing, the indifference
    curve will be concave to the origin
    CONSUMER’S BUDGET CONSTRAINT:

    Let M0 be the consumer’s money income, X1 and X2 are the two goods consumed, P1 and
    P2 are the prices of X1 and X2 .

    Then the budget equation is, M0 = P1 X1 + P2 X2


    This implies that money income must be spent on the two goods, X1 and X2 , and income
    equals expenditure. The budget must be completely exhausted in buying (purchasing).
    BUDGET LINE:

    This budget line shows all


    those combinations of two
    goods which the consumer can
    buy spending his given money
    income on the two goods at
    their given prices.
    SLOPE OF BL:

    • the slope of the budget line is equal to the ratio of the prices of two goods.

    slope = Px / Py
    SHIFT IN BUDGET LINE:

    • As price of a good changes:


    • As income of the consumer changes:
    CONSUMER’S EQUILIBRIUM:

    A consumer is in equilibrium when he


    maximizes his satisfaction subject to a
    limited money income and given market
    prices of goods and services.
    Slope of IC = Slope of BL
    MRSx for y = MUx/MUy = Px/Py
    THANK YOU

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