ORDINAL UTILITY

APPROACH
INTRODUCTION:

• J.R. Hicks of the Oxford University and R.G.D. Allen of the London School of
Economics.
• preference approach to consumer behavior
• X1 > X0 implies that the bundle X1 is preferred to the bundle X0 .
• X1 = X0 implies that the bundle X1 is indifferent to the bundle X0 .
INDIFFERENCE CURVE:

An indifference curve is defined as the set of combination of two goods (X1

and X2 ) which give the consumer same level of utility or satisfaction or
which are equally preferred.
CONTD…

INDIFFERENCE SCHEDULE INDIFFERENCE CURVE

ASSUMPTIONS:

• The consumer acts rationally so as to maximise satisfaction.

• There are two goods X and Y
• The consumer possesses complete information about the prices of the goods in the
market.
• The prices of the two goods are given.
• The consumer’s tastes, habits and income remain the same throughout the analysis.
• He prefers more of X to less of Y or more of Y to less of X.
PROPERTIES OF IC:

1. They Slope Negatively or Slope Downwards from the Left to the Right
2. They are Convex to the Origin of Axes:  Law of Diminishing Marginal Rate of
Substitution. (The marginal rate of substitution of X for Y (MRS)xy is the amount of Y
that will be given up for obtaining each additional unit of X)
3. Every Indifference Curve to the right represents Higher Level of Satisfaction than
that of the Proceeding One
4. Indifference Curves can neither touch nor Intersect each other, so that one
Indifference Curve Passes through only one Point on an Indifference Map
SLOPE OF IC:

The slope of the indifference curve is called the MRS which is the ratio of the marginal
utilities of the two commodities. This is expressed as

MRS x,y = – ΔY /ΔX = MUx/MUy

MARGINAL RATE OF SUBSTITUTION (MRS):

The marginal rate of substitution of X for Y (MRS)xy is the amount of Y that will be given
up for obtaining each additional unit of X. 
DIMINISHING MRS:

as the consumer moves

downwards along the
curve, he possesses
additional units of X, and
gives up lesser and lesser
units of Y, i.e.,
MRSXY diminishes.
• If the marginal rate of substitution is increasing, the indifference
curve will be concave to the origin
CONSUMER’S BUDGET CONSTRAINT:

Let M0 be the consumer’s money income, X1 and X2 are the two goods consumed, P1 and
P2 are the prices of X1 and X2 .

Then the budget equation is, M0 = P1 X1 + P2 X2

This implies that money income must be spent on the two goods, X1 and X2 , and income
equals expenditure. The budget must be completely exhausted in buying (purchasing).
BUDGET LINE:

This budget line shows all

those combinations of two
goods which the consumer can
buy spending his given money
income on the two goods at
their given prices.
SLOPE OF BL:

• the slope of the budget line is equal to the ratio of the prices of two goods.

slope = Px / Py
SHIFT IN BUDGET LINE:

• As price of a good changes:

• As income of the consumer changes:
CONSUMER’S EQUILIBRIUM:

A consumer is in equilibrium when he

maximizes his satisfaction subject to a
limited money income and given market
prices of goods and services.
Slope of IC = Slope of BL
MRSx for y = MUx/MUy = Px/Py
THANK YOU