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    Consumer Behavior Analysis: Ordinal Utility Approach: Meaning of Indifference Curve

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    Yashika Madan
    This document discusses the ordinal utility approach to analyzing consumer behavior. It outlines key assumptions including rationality, ordinal utility, transitive and consistent choices, and non-satiety. Indifference curves and marginal rate of substitution are introduced as tools to analyze how consumers make choices based on substituting goods while maintaining the same level of utility. Indifference curves represent combinations of goods that provide equal satisfaction, and marginal rate of substitution refers to the rate at which one good can be substituted for another while keeping total utility constant.

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    Consumer Behavior Analysis: Ordinal Utility Approach: Meaning of Indifference Curve

    Uploaded by

    Yashika Madan
    38 views1 page
    This document discusses the ordinal utility approach to analyzing consumer behavior. It outlines key assumptions including rationality, ordinal utility, transitive and consistent choices, and non-satiety. Indifference curves and marginal rate of substitution are introduced as tools to analyze how consumers make choices based on substituting goods while maintaining the same level of utility. Indifference curves represent combinations of goods that provide equal satisfaction, and marginal rate of substitution refers to the rate at which one good can be substituted for another while keeping total utility constant.

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    This document discusses the ordinal utility approach to analyzing consumer behavior. It outlines key assumptions including rationality, ordinal utility, transitive and consistent choices, and non-satiety. Indifference curves and marginal rate of substitution are introduced as tools to analyze how consumers make choices based on substituting goods while maintaining the same level of utility. Indifference curves represent combinations of goods that provide equal satisfaction, and marginal rate of substitution refers to the rate at which one good can be substituted for another while keeping total utility constant.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    38 views1 page

    Consumer Behavior Analysis: Ordinal Utility Approach: Meaning of Indifference Curve

    Uploaded by

    Yashika Madan
    This document discusses the ordinal utility approach to analyzing consumer behavior. It outlines key assumptions including rationality, ordinal utility, transitive and consistent choices, and non-satiety. Indifference curves and marginal rate of substitution are introduced as tools to analyze how consumers make choices based on substituting goods while maintaining the same level of utility. Indifference curves represent combinations of goods that provide equal satisfaction, and marginal rate of substitution refers to the rate at which one good can be substituted for another while keeping total utility constant.

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    Consumer Behavior Analysis: Ordinal Utility Approach

    Modern economists, particularly Hicks gave ordinal utility concept to analyze consumer
    behavior.
    He has used the tools, called indifference curve and Budget Line, for consumer behavior analysis.
    Assumptions:

    i. Rationality: Implies that a consumer is a rational being and aims at maximizing the total
    satisfaction given the income and prices of goods and services.

    ii. Ordinal Utility: Assumes that utility is expressible only in ordinal terms. This implies that a
    consumer is only able to express his/her preference for goods.

    iii. Transitivity and Consistency of Choice: Implies that consumer choices are assumed to be
    transitive and consistent. The transitivity of choice means that if a consumer prefers A to B and B
    to C, he/she would prefer A to C. On the other hand, the consistency of choice means that if a
    consumer prefers A to B in one period, he or she cannot prefer B to A in another period.

    iv. Non-satiety: Implies that a consumer is assumed to be non-satisfied. In other words, it is


    assumed that consumer does not reach the level of satisfaction by consuming a good and always
    prefers a large quantity of goods.

    v. Diminishing Marginal Rate of Substitution: Acts as an important concept in indifference


    curve analysis. Marginal rate of substitution implies the rate at which a consumer is willing to
    substitute one good (X) for another good (Y), so that the total satisfaction remains the same.

    Meaning of Indifference Curve:


    Indifference curve is defined as the locus of points on the graph each representing a different
    combination of two substitute goods, which yield the same utility or level of satisfaction to a
    consumer. The combinations of goods give equal satisfaction to a consumer.
    Therefore, a consumer is indifferent between any two combinations of two goods when it comes
    to making a choice between them. When these combinations are plotted on the graph, the
    resulting curve is called indifference curve. This curve is also called as iso-utility curve or equal
    utility curve.

    Marginal Rate of Substitution:


    An indifference curve is formed when one good is substituted for other. Marginal Rate of
    Substitution (MRS) refers to a rate at which one good is substituted for other, while keeping the
    level of satisfaction of a consumer constant. In other words, MRS between two goods X and Y is
    defined as the quantity of X which is required to replace Y or quantity of Y required to replace X,
    so that the total utility remains same.

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