Chapter 4

In this we will discuss about:

:- IC analysis different from utility analysis
:- Assumptions of IC analysis
:- Indifference Set and Indifference Curve
:- Features of Indifference Curve
:- Consumer’s Budget (Budget set & Line)
:- Consumer Equilibrium through
IC approach or Ordinal approach
IC analysis different from utility analysis

In the previous chapter we discussed

consumer equilibrium with reference to
utility analysis. The basic limitation of utility
analysis is that it is based on the assumption
of Cardinal measurement of utility.
The IC analysis of consumer's equilibrium
discard this assumption. It is based on the
concept of Ordinal measurement of utility.
According to this concept, utility is only
ranked as high or low.
 Assumptions of IC analysis

1) Money income of the consumer is given

and does not change.
2) The consumer spends his income on such
goods which can be substituted for each
other like apples and oranges.
3) The consumer’s preference for the two
goods is well defined.
4) More of a good always gives more
satisfaction to the consumer. This is called
'monotonic preference' for a good.
5) The consumer is rational. He always
maximises his satisfaction.
Indifference Set:-

It is a set of those commodities of two goods

which offers the consumer the same level of
satisfaction. So that the consumer is
indifferent across all combinations in his
indifference set.

Different Combinations of Apples and Oranges

Combinations Apples Oranges
A 1 10
B 2 7
C 3 5
D 4 4
Indifference curve :-
It is a diagrammatic presentation of an
indifference set of a consumer. It is locus of
all such points which show different
combinations of two commodities (like apples
and oranges) offering the same level of
satisfaction to the consumer.
Properties of indifference curves

1) IC slopes downward
2) It is convex to the origin
3) Higher IC shows higher level of satisfaction.
4) IC's do not touch or intersect each other.
5) IC does not touch x-axis or y-axis.
Budget set:-

It refers to attainable combinations of a set of

two goods, given prices of goods and income
of the consumer. The equation is

P1X1 + P2X2 ≤ Y

Budget set is also called budget constraint

as its shows the limit up to which the
consumer can buy a set of two goods with
his given income.
Budget line :-

It is a line showing different possible

combinations of good 1 and good 2 , which a
consumer can buy, given his budget and the
prices of good 1 and good 2.

P1X1 + P2X2 = Y
Shifting of Budget Line:-
(due to change in the income)
a) Forward Shift :-

b) Backward Shift :-
Rotation of Budget Line:-
(due to change in the price of goods)
a) Change in the price of good x

b) Change in the price of good y

 Determination of consumer equilibrium through
IC approach or Ordinal approach

For this we have to satisfy two conditions

Px
1) MRSxy =
Py

2) Where IC strucks price line that should be

convex to the point of origin.

To prove these conditions, let us take an

example:
Consumer consumes two goods
Good I = 2
Good II = 1
Consumer Income : 60