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Consumer Behavior Analysis: Ordinal Utility Approach: Meaning of Indifference Curve

This document discusses the ordinal utility approach to analyzing consumer behavior. It outlines key assumptions including rationality, ordinal utility, transitive and consistent choices, and non-satiety. Indifference curves and marginal rate of substitution are introduced as tools to analyze how consumers make choices based on substituting goods while maintaining the same level of utility. Indifference curves represent combinations of goods that provide equal satisfaction, and marginal rate of substitution refers to the rate at which one good can be substituted for another while keeping total utility constant.

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Yashika Madan
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88 views1 page

Consumer Behavior Analysis: Ordinal Utility Approach: Meaning of Indifference Curve

This document discusses the ordinal utility approach to analyzing consumer behavior. It outlines key assumptions including rationality, ordinal utility, transitive and consistent choices, and non-satiety. Indifference curves and marginal rate of substitution are introduced as tools to analyze how consumers make choices based on substituting goods while maintaining the same level of utility. Indifference curves represent combinations of goods that provide equal satisfaction, and marginal rate of substitution refers to the rate at which one good can be substituted for another while keeping total utility constant.

Uploaded by

Yashika Madan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Consumer Behavior Analysis: Ordinal Utility Approach

Modern economists, particularly Hicks gave ordinal utility concept to analyze consumer
behavior.
He has used the tools, called indifference curve and Budget Line, for consumer behavior analysis.
Assumptions:

i. Rationality: Implies that a consumer is a rational being and aims at maximizing the total
satisfaction given the income and prices of goods and services.

ii. Ordinal Utility: Assumes that utility is expressible only in ordinal terms. This implies that a
consumer is only able to express his/her preference for goods.

iii. Transitivity and Consistency of Choice: Implies that consumer choices are assumed to be
transitive and consistent. The transitivity of choice means that if a consumer prefers A to B and B
to C, he/she would prefer A to C. On the other hand, the consistency of choice means that if a
consumer prefers A to B in one period, he or she cannot prefer B to A in another period.

iv. Non-satiety: Implies that a consumer is assumed to be non-satisfied. In other words, it is


assumed that consumer does not reach the level of satisfaction by consuming a good and always
prefers a large quantity of goods.

v. Diminishing Marginal Rate of Substitution: Acts as an important concept in indifference


curve analysis. Marginal rate of substitution implies the rate at which a consumer is willing to
substitute one good (X) for another good (Y), so that the total satisfaction remains the same.

Meaning of Indifference Curve:


Indifference curve is defined as the locus of points on the graph each representing a different
combination of two substitute goods, which yield the same utility or level of satisfaction to a
consumer. The combinations of goods give equal satisfaction to a consumer.
Therefore, a consumer is indifferent between any two combinations of two goods when it comes
to making a choice between them. When these combinations are plotted on the graph, the
resulting curve is called indifference curve. This curve is also called as iso-utility curve or equal
utility curve.

Marginal Rate of Substitution:


An indifference curve is formed when one good is substituted for other. Marginal Rate of
Substitution (MRS) refers to a rate at which one good is substituted for other, while keeping the
level of satisfaction of a consumer constant. In other words, MRS between two goods X and Y is
defined as the quantity of X which is required to replace Y or quantity of Y required to replace X,
so that the total utility remains same.

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