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    Indifference Curve

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    vaibhav
    This document outlines the ordinal utility approach and indifference curve analysis. It discusses how utility cannot be measured cardinally but goods can be ranked ordinally based on their relative utility. Indifference curves have specific properties like negative slope and convexity. The indifference curve approach has advantages over the cardinal utility approach by being less restrictive in its assumptions. Budget constraints are represented by budget lines that shift based on price and income changes. Equilibrium conditions require marginal rate of substitution to equal price ratio. The effects of price and income changes on consumption are explained graphically. The ordinal utility approach arrives at the same conclusions as the cardinal approach but does not require as stringent assumptions.

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    Indifference Curve

    Uploaded by

    vaibhav
    80 views12 pages
    This document outlines the ordinal utility approach and indifference curve analysis. It discusses how utility cannot be measured cardinally but goods can be ranked ordinally based on their relative utility. Indifference curves have specific properties like negative slope and convexity. The indifference curve approach has advantages over the cardinal utility approach by being less restrictive in its assumptions. Budget constraints are represented by budget lines that shift based on price and income changes. Equilibrium conditions require marginal rate of substitution to equal price ratio. The effects of price and income changes on consumption are explained graphically. The ordinal utility approach arrives at the same conclusions as the cardinal approach but does not require as stringent assumptions.

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    This document outlines the ordinal utility approach and indifference curve analysis. It discusses how utility cannot be measured cardinally but goods can be ranked ordinally based on their relative utility. Indifference curves have specific properties like negative slope and convexity. The indifference curve approach has advantages over the cardinal utility approach by being less restrictive in its assumptions. Budget constraints are represented by budget lines that shift based on price and income changes. Equilibrium conditions require marginal rate of substitution to equal price ratio. The effects of price and income changes on consumption are explained graphically. The ordinal utility approach arrives at the same conclusions as the cardinal approach but does not require as stringent assumptions.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    80 views12 pages

    Indifference Curve

    Uploaded by

    vaibhav
    This document outlines the ordinal utility approach and indifference curve analysis. It discusses how utility cannot be measured cardinally but goods can be ranked ordinally based on their relative utility. Indifference curves have specific properties like negative slope and convexity. The indifference curve approach has advantages over the cardinal utility approach by being less restrictive in its assumptions. Budget constraints are represented by budget lines that shift based on price and income changes. Equilibrium conditions require marginal rate of substitution to equal price ratio. The effects of price and income changes on consumption are explained graphically. The ordinal utility approach arrives at the same conclusions as the cardinal approach but does not require as stringent assumptions.

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    Ordinal Utility

    Approach
    1. Utility is not measurable
    cardinally
    2. Cardinal measurement of
    utility is not necessary for
    analyzing consumer
    behaviour
    3. Utility can be measured only
    ordinally or comparatively
    4. So goods can be listed in
    order of their relative utility

    1. The indifference curves have a


    negative slope.
    2. The indifference curves of
    imperfect substitutes are convex
    to the origin.
    3. The indifference curves do not
    intersect nor they are tangent to
    one another.
    4. The upper indifference curves
    indicate a higher level of
    satisfaction

    Advantages of Indifference Curve


    Approach

    1. The indifference curve


    assumptions are less stringent
    or restrictive than those of the
    cardinal utility approach.
    2. The indifference curve provides
    a better criterion for the
    classification of goods into
    substitutes and compliments.
    3. The indifference curve provides
    a more realistic measure of

    Budgetary Constraints

    It is the limitedness of the income that acts


    as a constraint on how high a consumer can
    ride on his indifference map for given prices.
    It can be expressed through a budget
    equation in a two-commodity model :Px.Qx+
    Py.Qy= M where M is consumers money
    income, Pxand Pyare the prices of goods X
    and Y and Qxand Qyare their quantities.
    A change in the parameters of the budget
    equation cause the budget line shifting
    upward, downward and swivel left or right and
    up or down.
    The slope of the budget line is the same as
    the price ratio of the two commodities.

    Effects of Change in Price on


    Consumption
    Change in the price of a good, all other
    factors remaining constant, makes the
    budgentline rotate clock wise or anticlockwise. It makes the consumer shift from
    one equilibrium point to another.
    Graphical presentation of consumers
    movement along different equilibrium points
    gives price consumption curve.
    Price consumption curve shows the change
    in consumers basket of two goods at different
    prices of a good.
    In general, it shows increase in the
    consumption of the good whose price
    decreases and decrease in consumption of

    Consumer Equilibrium
    Conditions
    Necessary or first order conditions :
    MRS = Px/Py
    Supplementary of second order
    condition : MRS = Px/Pyat highest
    possible indifference curve

    Effects of Change in Income on


    Consumption
    Change in income makes the budget line
    shift upward or downward and therefore the
    consumer movement from one equilibrium
    point to another.
    The income-consumption curve
    represents various equilibrium quantities of
    two commodities consumed by a consumer
    at different levels of income, while all other
    things remain constant.
    As per the effect, the consumption of
    different kinds of commodities can be
    positive, negative or neutral.
    The income effect is positive for normal
    goods while it is negative in case of inferior

    Comparison of Cardinal and Ordinal


    Utility Approaches
    1. Both the approaches assume that
    rationality and utility maximize the
    behavior of the consumer.
    2. The diminishing marginal utility
    assumption of the cardinal utility
    approach is implicit in the diminishing
    marginal rate of substitution
    assumption of the ordinal utility
    approach.
    3. Both these utility approaches arrive at
    an identical equilibrium condition.
    4. These approaches arrive at the same
    conclusion with respect to the

    Superiority of Ordinal Utility Approach


    While cardinal utility approach assumes cardinal
    measurability of utility, the ordinal approach assumes
    only ordinal expression of utility. Besides, unlike the
    cardinal utility approach, the ordinal utility approach
    does not assume constancy of utility of money.
    Indifference curve approach provides a better
    criterion for the classification of goods into substitutes
    and complements. The cardinal utility approach uses
    the sign of cross-elasticity for the purpose of
    classifying goods into substitutes and complements.
    The indifference curve analysis suggests measuring
    cross-elasticity after compensating for the changes in
    real income resulting from the change in Px.
    Indifference curve analysis provides a more realistic
    measure of consumers surplus compared to one
    provided by Marshall. The Marshallian concept of
    Consumers surplus is based on the assumptions that

    It is the locus of points each representing a different


    combination of two substitute goods yielding the
    same utility or level of satisfaction to the consumer

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