Ordinal Analysis

Utility -Ordinal Analysis
Name:- Navleen Kaur

Class:- 11th Commerce
Roll No:- 11
Subject:- Economics
Contents
Meaning of utility
• Types of utility
Ordinal utility approach
• Indifference curve concept
• Indifference schedule
• Marginal rate of substitution
• Why MRS diminishes?
• Indifference curve
• Monotonic preferences
• Indifference map
Budget line
• Algebraic expression of budget line
• Diagrammatic explanation of budget line
Consumer equilibrium by indifference curve
Conclusion
Meaning of
Utility
The meaning of utility refers to the ability of a commodity to
meet human needs in economics. Human needs are satisfied
when a product’s utility is high. As a result, “utility” is defined
as “wants met by the capability of commodities or services”.
Types of utility
 Cardinal utility
 Ordinal utility
Ordinal Utility
Approach
• The elaboration of the indifference curves was made by J.R. Hicks and
R.G.D. Allen popularly known as Hicks & Allen.
• Modern economists disgraced the concept of cardinal utility approach.
• According to them a consumer can rank various combinations of goods
& services.
• Ordinal utility is the utility expressed by ranks.
Indifference curve concept
• Indifference curve refers to the graphical representation of various alternative
combinations of bundles of two goods among which the consumer is indifferent.
• It is also known as “Equal Satisfaction Curve”.
Indifference schedule
Combination of Apples Apples Bananas MRS
and Bananas
P 1 15
Q 2 10 5B:1A
R 3 6 4B:1A
S 4 3 3B:1A
T 5 1 2B:1A
Marginal Rate of Substitution
• MRS refers to the rate at which the commodities can be substituted with each
other so that total satisfaction of the consumer remains the same.
Units of Bananas [B] willing to sacrifice
• MRS AB =
Units of Apples [A] willing to Gain
• MRS measures the slope of indifference curve.
Why MRS diminishes ?

MRS falls because of the law of diminishing marginal utility.
Indifference curve
Monotonic Preferences
• Monotonic Preferences means that a rational consumer always prefers more of a
commodity as it offers him a higher level of satisfaction.
Indifference map
• Indifference map refers to the family of indifference curves that represent
consumer preferences over all the bundles of the two goods.
Higher Indifference
curve represents
higher levels of
satisfaction.
IC 3 < IC 2 < IC 1
Budget Line
• Budget Line is a graphical representation of all possible combinations of two goods
which can be purchased with given income and prices such that the cost of each
combination is equal to the money income of the consumer.
Algebraic Expression of Budget Line
M= [Px X Qx] + [Py X Qy]

Diagrammatic Explanation Of Budget Line
Schedule
Combination Apples [A] [₹4] Bananas [B] [₹2] Money spent =
Income
E 5 0 [5x4] + [0x2] = 20
F 4 2 [4x4] + [2x2] = 20
G 3 4 [3x4] + [4x2] = 20
H 2 6 [2x4] + [6x2] = 20
I 1 8 [1x4] + [8x2] = 20
J 0 10 [0x4] + [10x2] = 20
Consumer’s Equilibrium by
indifference curve analysis
The point of equilibrium or maximum satisfaction is achieved by the study of the indifference map and budget
line together. An indifference map represents every possible indifference curve that the consumer has, which
helps in ranking their preferences. The combination of goods on the higher indifference curve gives a higher
satisfaction level to the consumer. Therefore, the highest of the indifference curves of an indifference map is
preferred by a consumer.
MRS = Ratio of prices

MRS of
or
Px indifference
Py = Market Rate of exchange curve falls
or
because of the
Slope of indifference curve = slope of Budget
law of DMU
line
• The budget line is tangent to indifference curve IC 2 at point E. This is
the point of consumer’s Equilibrium. Where the consumer purchases
on quantity of commodity X and on quantity of commodity Y
Conclusion
"In conclusion, ordinal utility theory offers us a valuable framework for
understanding consumer preferences and decision-making in economics. By
focusing on the ranking or order of preferences rather than their precise
numerical measurement, ordinal utility theory provides a realistic model
that reflects the complexities of human choice. It emphasizes that
individuals make decisions based on relative satisfaction rather than
absolute values, which aligns with real-world behavior. Understanding
ordinal utility helps us grasp how consumers maximize their satisfaction
given limited resources, guiding policymakers and businesses in making
informed decisions. As we continue to explore economic theories, ordinal
utility stands as a foundational concept that bridges theory with practical
applications, offering insights into the dynamics of markets and individual
behavior."

Ordinal Analysis

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Utility -Ordinal Analysis

Name:- Navleen Kaur

• MRS measures the slope of indifference curve.

Why MRS diminishes ?

Algebraic Expression of Budget Line

M= [Px X Qx] + [Py X Qy]

MRS = Ratio of prices

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