Utility analysis of demand

1. Utility analysis of demand
ordinal approach
(Indifference curve technique)
Abhijit Das
1st year, 2nd semester
Departrment of Agricultural Economics
Dr.RPCAU, PUSA

2. Consumer’s scale of preferences
• All desires of the consumer are not of equal urgency or
importance.
• Since his resources are limited and he cannot fulfil his desire, he
must pick and choose more important and more urgent desires for
satisfaction.
• This is how aconsumer ranks his desires and build up scale of
preferences.
• Scarcity forces him to choose.

3. Indiffernce curves
• On the basis of the consumer’s scale of preferences, we can draw
indifference curve.
• An indifference curve represents satisfaction of a cosumer from
two commodities.
• It is drawn on the assumption that for all possible points on an
indifference curve, the total satisfaction remains the same.
• Hence the consumer is indifferent as to the combinations lying on
the indifference curve.
• It is an iso-unity curve

4. Example
• Good x represents mangoes & good y represents
apples.
• A consumer who wanted to buy apples and mangoes.
• From this diagram we can see the different
combinations of apples and mangoes, which a
consumer can buy.
• The consumer obtains as much total satisfaction from
30 apples and 4 mangoes and as well as from 20 apples
and 5 mangoes and as well as from the other
combinations.
• In other words our consumer is indifferent whether he
gets combination A, the combination B, the
combination C, combination D, combination E or
combination F.
• The total satisfaction is same in all these
combinations.
Fig.01

5. Indifference Map
• We can draw similar IC s showing
combinations of apples and mangoes
which represents greater and lesser
satisfaction.
• In this fig. all points on i5 and i4 are
preferred to all points on i1 or i2 or i3.
• All combinations of apples and mangoes
on i2 are equally preferred and are more
preferred to all combinations at various
points on i1.
• In other words i1 represents the lower
level of satisfaction and i5 represents the
higher level of satisfaction.
mango
apple
Fig.02

6. • It should be borne in mind that we cannot say how much utility the
higher IC represents.
• That is, the aggregate utilities are rankable not measurable.
• We cannot say how much greater utility does i2 represents than i1.

7. Marginal rate of substitution
• The MRS shows how much of one commodity is substituted for how
much of another or at what rate a consumer is willing to
substitute one commodity for another in his consumption pattern.
• The concept of MRS is a tool of IC technique.
• The MRS may thus be defined as the amount of apples that is
sacrificed for obtaining one mango.
• MRS of X for Y is equal to dY/dX, we notice that as the consumer
slides down further and further on the IC, dY becomes shorter and
shorter and dX remains same.

8. Properties of IC
1. Downward sloping to the right,
2. Non-intersecting,
3. Convex to the origin, and
4. Higher IC, higher is the level of satisfaction and vice, versa.

9. Downward or Negatively sloped of IC
• It is because when the consumer decides to have more units of
one goods, he will have to reduce the number of the units of the
other goods, if he is to remain in the same IC.
• Looking at the diagram in fig.01 we find that when consumer
moves from point A to point B, he has more mangoes before, but
the number of apples with him falls similarly from B to C and C to
D.
• This is the meaning of an IC sloping downward from left to right.

10. Non intersecting of ICs
• Indifference curves cannot cross.
• If the curves crossed, it would mean that the
same bundle of goods would offer two
different levels of satisfaction at the same
time.
• Showing same level of satisfaction by the same
bundle of goods at the same time is not
possible.
• So IC s never intersects each other.

11. Price line or Budget line concept
• Suppose our consumer has Rs.15 to spend on apple
and mangoes.
• Further suppose that the price of mangoes in the
market is Rs.1.50/unit and the price of apples is
Rs.1.00/unit.
• With rs.15 he can buy 10 mangoes(OB) and no
apples or 15 apples(OA) and no mangoes.
• By joining points A and B, we get what is called
price lone or budget line.
• This shows all the possible combinations of two
goods that the consumer can buy in the line AB,
ex. At point U he will buy 6 mangoes and 6 apples
with Rs.15
6
6

12. Consumer’s equilibrium or Maximum
satisfaction
• The consumer is said to be in equilibrium
when he obtains the maximum possible
satisfaction from his purchases, given the
prices in the market and the amount of money
he has for making purchases.
• The consumer will be in equilibrium at the
point C, i.e., 3 quantities of mangoes and 3
quantities of apples.
• The cosumer will maximise his satisfaction
and be in equilibrium at a point where the
price line touches (or tangent to) an IC.
• Such a point in this diagram lies in i2, this is
the highest IC to which he can go.
m
n

13. • If he chooses a combination of mangoes and apples represented by
A, he will be on a lower IC and will thus be getting less
satisfaction.
• Similarily if he chooses point B, it is also lies on the lower IC and
will thus be getting less satisfaction.
• Thus we can conclude that at the point C the consumer gets
maximum satisfaction and equilibrium will occur at that point
only.

14. THANK YOU