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Lec 2.2 Ordinal Utility Approach.pptx
1. Ordinal Utility Approach- assumptions
Rationality
Utility is Ordinal
Diminishing Marginal Rate of Substitution
The total utility of the consumer depends on the quantity of the
commodity consumed i.e.
U=f (q1 q2 ….qn)
Consistency and transitivity of choice
Non satiety
Complete Ordering;
More is Preferred to Less;
Optimality
88
2. Indifference Curve
• The Indifference Curves
• Indifference curves reveal consumer’s preferences for X
and Y by identifying the combinations of X and Y which
yield the same level of total utility.
25
20
15
10
5
0
5 10 15 25
20
a
b
c
d
Commodity X
Commodity
Y
Figure : Indifference Curve
Combination Good X Good Y MRS
A 1 18 -
B 2 13
C 3 9
D 4 6
E 5 4
F 6 3
3. Properties of Indifference Curve
Indifference curve have negative slope
Indifference Curve are Convex to Origin
Indifference cannot touch or Intersect each other
Higher Level of Indifference Curve Represents Higher Level of
Satisfaction
A number of indifference curves representing various levels if
satisfaction form an indifference map
Figure : Indifference Map
Quantity of X
Quantity
of
Y
Y
O X
IC4
IC3
IC2
IC1
4. Budget line and Constraint
• The Budget Line
• Budget line illustrates the consumer’s income constraint by showing all of the
combinations of quantities of X and Y that the consumer can buy.
• Budget Constraint-Income acts as a constraint in the attempt for maximizing
utility and is known as budget constraint.
Y = px qx+ py q y
Y/Py
Budget Line
Y/Px
Commodity
Y
Commodity X
Figure : Budget Line
Combination Good X(Rs2 per
unit)
Good Y(Rs 1 Per
unit
Money
A 0 10 10
B 1 8 10
C 2 6 10
D 3 4 10
E 4 2 10
F 5 0 10
5. Consumers Equilibrium
• When a budget line is tangent to the indifference curve.
• Indifference curve should be convex to the origin
• At the point of equilibrium slope of the budget line and indifference
curve should be same
Combination Good X(Rs2 per
unit)
Good Y(Rs 1 Per
unit
Money
A 5 0 10
B 4 2 10
C 3 4 10
D 2.5 5 10
E 1.5 7 10
F 1 8 10
G 0 10 10