Ordinal Utility Indifference Curve Properties and Marginal Rate of Substitution

1. Ordinal Approach
Indifference Curve, it’s Properties and
MRS
Dr. Dhiresh Kulshrestha
Associate Professor (Economics)

2. Ordinal Approach
• As we assumed that: Utility could be measured using the unit of utils.
• However, what will happen if utility cannot be measured absolutely?
• How will we achieve consumer equilibrium?
• To Answer these questions, the ‘indifference curve’ and Budget line analysis are
used to explain the conditions of consumer equilibrium or maximum utility.

3. Indifference Curve
• Indifference curve (IC) is the locus of all those combination of two goods
which give the same level of satisfaction to the consumer.
• Thus consumer is indifferent towards all the combinations lying on the same
indifference curve.
• In other words, consumer gives equal preference to all such combinations.

4. 2
• An indifference curve represents all the possible combinations of two
goods, which will give the same level of satisfaction.
• All the possible points on the indifference curve will have equal total
satisfaction.

5. Assumptions of Indifference Curve
• A1: Scale of Preference: “A consumer knows his/her preferences and
decides on an alternative combination, based on his/her preferences.
• A2: Consumer’s Preferences are termed transitivity: Transitivity
means that if a consumer prefers A to B, and B to C,
Then he/she must prefer A to C Like As: A=B, B= C then A = C

6. 2
• A3: Rationality: A Consumer is rational in his/her behaviour and seeks to
maximize his/her total level of satisfaction.
• A4: Diminishing Marginal Rate of Substitution: The rate of substitution
between two continues to decline, due to the operation of the law of
diminishing marginal utility.

7. Indifference Schedule

8. Indifference Curve between Two Goods

9. Marginal Rate of Substitution
MRS
• The marginal rate of substitution basically studies the indifference curve.
• It shows that as a consumer gets more unit of X , he/ she has to sacrifice
some units of Y to maintain his/her satisfaction level.
• MRS refers to the ‘Rate at which goods are substituted for other goods.’

10. Marginal Rate of Substitution

11. MRS Calculation

13. PROPERTIES OF IC 1
• An Indifference curve has negative slope i.e. it slope downwards from left
to right.
• 2. Indifference curve is always convex to the origin.
• This implies that two goods are imperfect substitutes and MRS between
two goods decreases as a consumer move along an indifference curve.
• IC will be straight line if MRS is constant and L shaped in case of
Complimentary.

14. PROPERTIES OF IC 3.
• Two Indifference curves never intersect or become tangent to each other.
• This will violet the rule of Transitivity because: on IC1 A is equally
preferred to B and on IC2 A is equally preferred to C.
• This implies B is equally preferred to C, which can not be because more is
always preferred to less.

16. PROPERTIES OF IC 4.
• Higher indifference curve represents higher satisfaction.
• This is because the combinations lying on higher indifference curve
contain more of either one or both goods and more is always preferred to
less.

18. PROPERTIES OF IC 5.
• Indifference curve touches neither X-axis nor Y-axis (By Definition)

20. BUDGET CONSTRAINTS/Budget line or Price Line:
• Shows all possible combinations of two goods that the consumer can
buy if he spends the whole of his given sum of money on his purchases at
the given prices.
• Budget constraints limit an individual’s ability to consume in light of
the prices they must pay for various goods and services.