Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
18 views

Lecture-5 - Ordinal Approach

It's a best pdf kor mba student.......................

Uploaded by

rimapatra144
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
18 views

Lecture-5 - Ordinal Approach

It's a best pdf kor mba student.......................

Uploaded by

rimapatra144
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 10

Lecture-5

Calcutta Business School


Managerial Economics
PGDM
Academic Year 2024-25
Unit-II: Consumer Behaviour
Analysis: Ordinal Approach
Ordinal Approach
Ordinal Approach:
✓ Originally introduced by Pareto in 1906
✓ Satisfaction cannot be measured in absolute numbers, indeed can be ranked in order of preferences
✓ Indifference Curve Analysis (initially developed by Francis Ysidro Edgeworth in 1881). Later on Pareto was the
first one to actually draw these curves in 1906. Hicks and R.G.D. Allen published their comprehensive work based
upon Edgeworth, Pareto & Slutsky in 1934

Ordinal Approach
✓ Ordinal Approach postulates that a consumer cannot measure the satisfaction that he/she derives from the
consumption of a particular good or service. Further, it asserts that measurement of satisfaction in specific units is not
required. In fact, a consumer ranks different goods and services as per his/her preferences. In other words, it asserts that
a consumer takes his consumption decisions on the basis of the ranks assigned in order of his/her preferences.
Ordinal Approach- Indifference Curve
An indifference curve represents a graph showing a combination of two goods that give a consumer equal satisfaction and
utility, making the consumer indifferent to choosing between them. In other words, on an indifference curve, every point
indicates that the consumer derives the same level of utility from different combinations of the two goods. The concept is
central to the theory of consumer choice in microeconomics.
Example:
Imagine a consumer choosing between apples and oranges. The indifference curve might show various combinations, such
as:
•3 apples and 5 oranges
•4 apples and 3 oranges
•6 apples and 2 oranges
Each combination gives the consumer the same level of satisfaction, so the consumer is indifferent to choosing any of these
points.
Ordinal Approach- Indifference Curve
Properties of Indifference Curves:
1.Downward Sloping: Indifference curves are typically downward sloping
from left to right. This means that as the quantity of one good increases,
the quantity of the other good must decrease to maintain the same level
of utility. This property reflects the trade-off between the two goods.
2.Convex to the Origin: Indifference curves are convex to the origin. This
convexity reflects the principle of diminishing marginal rate of substitution
(MRS), which means that as a consumer substitutes one good for another,
the willingness to trade decreases. In other words, the consumer is willing
to give up less of one good to obtain additional units of the other good as
they move along the curve.
3.Non-Intersecting: Indifference curves cannot intersect. If two
indifference curves were to intersect, it would imply that the same
combination of goods provides two different levels of utility, which is
impossible. Each curve represents a different level of satisfaction or utility.
Ordinal Approach- Indifference Curve

4. Higher Indifference Curves Represent Higher Utility Levels: An


indifference curve that lies above and to the right of another
curve represents a higher level of utility. This is because, at any
given point on a higher curve, the consumer has more of at
least one good (or both goods), leading to greater satisfaction.
5.Indifference Curves Are Continuous and Smooth: Indifference
curves are usually assumed to be continuous and smooth,
reflecting the idea that goods can be divided into infinitely small
units and that consumer preferences are consistent and do not
have abrupt changes.
6.Diminishing Marginal Rate of Substitution (MRS): The MRS is
the rate at which a consumer is willing to trade one good for
another while remaining on the same indifference curve (i.e.,
maintaining the same level of utility). As you move down along an
indifference curve, the MRS decreases, reflecting the consumer’s
decreasing willingness to substitute one good for another.
Indifference Curve [Special Cases]

Neutral Good: When a


consumer is indifferent
between having more or
less of the commodity

X Neutral & Y Normal X normal & Y Neutral


Indifference Curves between Indifference Curves between
Neutral and Good Neutral and Good
Consumer’s Budget
The maximising behaviour of the consumer is constrained by his limited income. With only a limited income a consumer
cannot purchase all that he/she wants. The availability of consumption bundles to a consumer depends mainly on the
following two factors.
• Price of goods and services ( P )
• Income of the consumer ( M )
Given the income of the consumer and the prices of the goods and services, a consumer can purchase only those
combinations of goods and services such that his total expenditure on the goods and services is less than or equal to his
income.
Budget Set
A budget set represents those combinations of consumption bundles that are available to the consumer given his/her
income level and at the existing market prices. In other words, it represents those consumption bundles that the consumer
can purchase using his/her money income ( M ).
Consumer’s Budget

Note: The use of ≤ sign in the constraint, implies that the total amount spent on two goods together should be less than or
equal to his/her given income level. In other words, a particular consumption bundle is available or affordable to a
consumer if the total money spent on both the goods is less than or equal to the total available money income.

The budget equation is of the following form


P1x1 + P2x2 = M
Solving for x2 :
P2x2 = M – P1x1

is the vertical intercept. It represents the amount of x 2 that the


consumer can purchase if he spends his entire income on good 2.
represents the slope of budget line. This is also called the price ratio .
The negative sign depicts the negative slope of the budget line from left
to right.
Pivot and Shift in Consumer’s Budget
Consumer’s Equilibrium using Ordinal Approach

It should be noted that all other points lying on the budget


line (such as point B and point C ) are inferior to ( x 1 * x
2 *) as they lie on a lower IC . Thus, the consumer can
rearrange his consumption and again reach equilibrium
where the marginal rate of substitution is equal to the
price ratio.
For example, at point B , MRS is greater than the price
ratio (i.e.
In this case, the consumer would tend to
move towards point E by giving up some amount of good
2 to increase the consumption of good 1.
Similarly, at point C , MRS is less than price ratio (i.e.

In this case the consumer would tend to move towards


point E by giving up some amount of good 1 to increase
the consumption of good 2.

You might also like