Ordinal Utility Analysis

 ORDINAL UTILITY ANALYSIS WAS DEVELOPED BY

J R HICKS AND RGD ALLEN.
A C C O R D I N G T O T H E M , U T I L I T Y I S N O T M E A S U R A B L E
IN QUANTITATIVE TERMS NAMELY NOT IN UNITS BUT
THEY CAN COMPARE OR RANK THE LEVEL OF
SATISFACTION. HENCE, AN ALTERNATIVE APPROACH.
 Indifference Curve Analysis

 An indifference curve is derived from a table showing

the various combinations of x and y that the
consumer would consider equally or giving the same
level of satisfaction.
 Combination Good X Good Y
A 1 15
B 2 11
C 3 8
D 4 6
E 5 5
Indifference Curve
 Indifference Curve

 The indifference table can be represented

graphically-indifference curve as given above.

 It is a downward sloping curve showing that as the

consumer goes on consuming additional quantities
of a good, he is forgoing the consumption of the
other good- say X and Y.
 Indifference Curve-Contd…

 It is a locus of the various combinations of two goods that

will give same level of satisfaction-all combinations are
similar to him.
 Properties of indifference curve
 a) Indifference curve slopes from left to right-trade off
between two goods-one more or one good means less of
the other-MRS xy
 b) It is convex to the origin- As he moves from left to
right he is increasing the consumption of ‘X’ at constant
units, say one unit but he is ready to forgo less and less
quantities of the other-diminishing MRS
 I C-contd…

 c) Higher indifference curve represents higher level

of satisfaction
 d) Indifference curves do not intersect each other-
consistency or transitivity assumption.
Indifference map
It is a collection of various indifference curves-
Higher indifference curves represent higher levels of
Satisfaction.
Indifference curve analysis and Price line
Consumer equilibrium
Tangency Solution
 Meaning of the Equilibrium

 The Price Line is tangent to the indifference curve

 At tangency, the slope of the indifference curve is
equal to the slope of the price line
 The slope of the indifference curve shows MRS xy
whereas the slope of the price line shows the price
ratio.