Meeting 6

Consumer Behavior
Theory: Ordinal Approach

MANAGERIAL ECONOMIC TEAM

Pokok Bahasan

Meeting 5b
Consumer Behavior Analysis (Ordinal Approach):
▪ Ordinal approach concept
▪ Indifferecne Curve
▪ Budget Line
▪ Maximum Utility analysis
▪ Effects of changes in prices and changes in income

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Ordinal Approach
Consumer satisfaction in consuming a number of goods cannot be measured
by numbers or numerical but can only be compared, which one is higher or
which one is lower.

Comparing an item with another item, then giving the order of the results of the
comparison

So that it can reveal the benefits received by consumers in consuming a

combination of two goods

In the ordinal approach, how to compare customer satisfaction using the

concept of the Indifference Curve Approach 3
 Assumptions of Ordinal Theory
Rationality Rating Concept Diminishing Marginal Price Taker
Consumers try to That consumers are Rate of substitution Consumers are considered as
achieve the maximum able to give a rating of To maintain the same level takers or followers of market
level of satisfaction by the preferred of satisfaction, the ability of prices, because they accept
using a certain income combination of goods one good to substitute for market prices as determined
at the prevailing prices the reduction of another and adjust their behavior to
in the market. good will decrease certain costs and budgets.

Transitivity of Preference
That if A is preferred to B, and B is preferred to C, then A is preferred to C.

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Indifference Curve
The curve connecting the points of combination of two kinds of goods (Goods X and Goods
Y) that individuals want to consume at the same level of satisfaction

Qy Goods x and Goods y are considered substitutes

Kepuasan < Kepuasan < Kepuasan

𝑌1 A
• Titik A = Kepuasan A  kombinasi konsumsi dan
𝐼𝐶 3 • Titik B = Kepuasan B  kombinasi konsumsi dan
𝑌2 B
𝐼𝐶 2
Kepuasan A = Kepuasan B
𝐼𝐶 1 Artinya: menunjukkan kombinasi barang X dan barang Y yang
Qx
𝑋 1𝑋 2 akan menghasilkan kepuasan yang sama disepanjang garis IC

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The nature of Indifference Curve
Negative Slope
This shows that if consumers want to consume more goods X, they must sacrifice consumption of
goods Y to get the same level of satisfaction(because it is influenced by limited income)

Can it have a positive slope? Yes it Can, but

But it is irrational, because by increasing the consumption of goods x and goods y should
increase the level of satisfaction (but what happens the level of satisfaction remains still).

The farther away from the origin

This shows that the farther IC from the origin point, the greater the level of satisfaction obtained by
consumers from the combination of consumption of goods x and goods y
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The nature of Indifference Curve (2)
Convex to the origin
This shows that the slope of each point is different, meaning that the proportion of the number of
goods that will be sacrificed is different to increase the number of other goods consumed (the
combination of consumption changes).

Marginal Rate of substitution (From point A to Point B)

When you want to add 1 unit of item x, you have to reduce the consumption of item y by 3
units (MUx > MUy)

Never intersect
Will never get the same level of satisfaction on different IC curves (Because if they intersect it will
violate the concept of transitivity)

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Draw the IC curve

Combination table of two types of goods

Baju

Makanan Baju
Titik
𝑌4 D
(Barang X) (Barang Y)
𝑌3 C
60 () 10 () A 𝑌2
B
50 () 20 () B 𝑌1 A
C
𝐼𝐶 1
40 () 30 () Makanan
30 () 40 () D 𝑋 1𝑋 2𝑋 3𝑋 4

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Marginal Rate of Subsitution (MRS)
The degree to which consumers will sacrifice one type of good to increase consumption of another
good

The rate of substitution of good X for goods Y

(marginal rate of substitution X for Y)
Baju
∆𝑌 𝑌 2 −𝑌 1 20 −30 − 10
𝑀𝑅𝑆= = =− = =− 1
∆ 𝑋 𝑋2 − 𝑋1 30 −20 10
= 30 A
It means:
= 20
∆𝑌 B The consumer will add one unit of good X to reduce the
consumption of one unit of good Y
∆𝑋 𝐼𝐶 1
Makanan
=20 =30
Draw the Indifference Curve Maps
Group of IC
Draw contour lines that show the combination of consumption of two goods and services that
consumers are able to choose from all available possibilities so as to achieve maximum satisfaction.

Utility increases as the individual moves to a higher

Qy
indifference curve
It means:Provide an illustration that utility/satisfaction
𝑌1 A will increase if moving from a combination of goods X
and goods Y from to or to
𝐼𝐶 3
𝑌2 B
𝐼𝐶 2
𝐼𝐶 1
Qx
𝑋 1𝑋 2 10
 Indifference Curve Custom Preferences
Cigarette
grinding
Useless Goods(Cigarette grinding with food)
𝐼𝐶 1 𝐼𝐶 2 𝐼𝐶 3 The utility will shift from   when consumers get extra from food
consumption regardless of how many cigarette grinders there are, because an
increase in the purchase of cigarette grinders will not increase the utility
obtained

𝑋 1 𝑋 2 𝑋 3 Food
Number of Constant
Flies 𝐼𝐶 1 Goods that have a negative impact on the economy(number of
flies with food)
𝐼𝐶 2
The amount of food is assumed to be constant at level 10, so that
𝐼𝐶 3 when there is an increase in the number of flies, the utility level
will decrease (   ), So with the addition of flies, individuals
are willing to reduce the amount of food
𝐼𝐶 1
Makanan 11
𝑋 1 𝑋 2 𝑋 310
 Indifference Curve Custom Preferences(2)
Exxon gasoline
Perfect Substitution(Exxon Gasoline and Pertamina Gasoline)
In this case, consumers are willing to substitute the same size between two
goods with perfect substitution properties(1 liter exxon gasoline with 1 liter
𝑌2 𝐴 pertamina gasoline)(MRS level =1)

𝑌1 𝐵
𝐼𝐶 1 𝐼𝐶 2
Pertamina
𝑋 1𝑋 2 Gasoline
Right Shoe Constant
Perfect Complementary(Right Shoe and Left Shoe)
Goods that are consumed must be consumed simultaneously (right
shoe and left shoe), because if only one of them is consumed, it
𝑌3 𝐼𝐶 3 𝐼𝐶 3 will not increase satisfaction
𝑌2 𝐼𝐶 2
𝑌1 𝐼𝐶 1
Left Shoe 12
𝑋 1𝑋 2𝑋 3
Budget Constraint
Shows the level of combination of goods or services (goods x and goods y) that individuals are able to
buy and consume

Barang Y The ability to consume goods X and goods Y is

I = Px * X + Py * Y
limited by income

Slope Budget Constraint:

𝐼
𝑃𝑦
Y= *X Slope = to what extent are goods X
and goods Y
Keterangan: interchangeable in the
𝐼 Barang X ▪ I = Pendapatan market?
𝑃𝑥
▪ Px = harga barang X
▪ Py = harga barang Y
▪ X = jumlah barang X yang dikonsumsi
▪
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Y = Jumlah barang Y yang dikonsumsi
Changes in Income Levels in the Budget Constraint
An increase in income causes the budget line to shift to the right, parallel to the original budget line,
vise versa. (The assumption is that the prices of goods X and Y do not change).

The budget line shifts to the right, from to , intercept about the Y
axis of become while the intercept about the X axis of become

Since both prices are fixed, the slope of the budget line does not
change

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Changes in the Price Level of Good X on the Budget Constraint
If the price of one of the goods changes, the budget line will rotate, its slope will change

𝐼 For Example:
𝑃y ▪ The price of good X decreases, while the price of Y remains,
the budget line will rotate counterclockwise (moving from K
to K').
▪ The price of X increases, while the price of Y remains
constant, it will rotate clockwise (moving from K to K").
𝐼 𝐼 𝐼
𝑃x2 𝑃 x 𝑃 x1

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 Kombinasi Optimal

Utility Maximization Analysis

This happens when the indifference curve is tangent to the budget constraintThis means that
consumption activities that produce maximum satisfaction by using a proportional combination of
goods X and goods Y
Y
Point A = Optimum Combination
A rational consumer will not choose a point other than point C
A (because the resulting satisfaction is smaller or decreases)

𝐼𝐶 3
B 𝐼𝐶2
𝐼𝐶 1
X 16
Next meeting-> Basic Concepts of Production Analysis

▪ What is Production, Production Function

▪ Dimensions of Short and Long Run Production
▪ FIRST ANALYSIS: Production Theory With One Changing Factor
(TPP (total physical product), APP (average physical product, MPP
(marginal physical product)
▪ SECOND ANALYSIS: Production Theory With Two Changing
Factors (Isoquant, Isocost, Least Cost Combination (LCC)
▪ Return to Scale (Constant Return to scale, Increasing Return to
scale, Decreasing return to scale)
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