Lec 2.2 Ordinal Utility Approach.pptx

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

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

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

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

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

Income consumption curve
In case of normal goods In case of inferior goods

Lec 2.2 Ordinal Utility Approach.pptx

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Lec 2.2 Ordinal Utility Approach.pptx