Indifference curve analysis ordinal utility approach
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The document discusses indifference curve analysis using an ordinal utility approach, defining indifference curves as combinations of goods providing the same satisfaction. It outlines assumptions, properties of indifference curves including their negative slope and convexity, and the concept of marginal rate of substitution. An indifference schedule is provided, illustrating consumer choices between apples and mangoes while maintaining equal satisfaction.
Indifference curve analysis ordinal utility approach
- 1. INDIFFERENCE CURVE ANALYSIS : ORDINAL UTILITY APPROACH Name – Vipul gangwar
- 2. CONTENTS • Definition of indifference curve • Assumptions • Indifference schedule • Indifference curve • Marginal rate of substitution • Some properties of IC
- 3. DEFINITION: IC An indifference curve(IC) is the locus 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. Assumptions • Rational behavior of the consumer • Utility is ordinal • Consistency in choice • Transitivity in choice making • Utility is the function of quantity of the commodities.
- 5. Indifference Schedule: Combinations Apples Mangoes A 15 1 B 11 2 C 8 3 D 6 4 E 5 5
- 6. Indifference curve IC shows all possible combinations of apples and mangoes between which a person is indifferent. Point A shows consumption bundle consisting of 15 apples and one mango. Moving from point A to Point B, we are willing to give up 4 apples to get a second mango (total utility is the same at points A and B). Indifference curve
- 7. MARGINAL RATE OF SUBSTITUTION (MRS) The marginal rate of substitution of X for Y (MRSxy) is defined as the amount of Y, the consumer is just willing to give up to get one more unit of X and maintain the same level of satisfaction. MRSMRSxyxy = Decrease in the Consumption of Y Increase in the Consumption of X = (-) ∆Y ∆X
- 8. PROPERTIES OF IC 1. An Indifference curve has negative slope i.e. it slope downwards from left to right. Given a combination of commodity X and commodity Y, with every increase in X, the amount in Y should fall in order that the level of satisfaction from every combination should remain the same.
- 9. 2. Indifference curve is always convex to the origin. Convexity illustrates the law of diminishing marginal rate of substitution. PROPERTIES OF IC
- 10. PROPERTIES OF IC 3. Two Indifference curves can never intersect each other. Indifference curves can never intersect each other because each indifference curve represents a specific level of satisfaction. If two indifference curves intersect each other, then at the point of intersection, the consumer is experiencing two different levels of utility.
- 11. PROPERTIES OF IC 4. Higher indifference curve represents higher satisfaction. More is preferred to Less Indifference map
- 12. PROPERTIES OF IC 5. Indifference curve touches neither X-axis nor Y-axis. 12 10 8 6 4 2 0 1 2 3 4 5 Apples Oranges IC1 A(0, 10) X