Ordinal Utility Analysis:
The proponents of this approach are J.R.Hicks and R.G.D Allen. According to them,
human satisfaction which is psychological phenomenon cannot be measured
quantitatively in monetary terms as expressed in Marshall's utility analysis. To them,
consumer behaviour is based on preference hypothesis.
Assumptions of Ordinal Approach :
1. Rationality- Maximising the satisfaction from consumption , given his income and
prices og goods.
2. Ordinality- Scale of Preference i.e. the cnsumer has a set of priorities with respect
to diffferent combinations.
3. Diminishing Marginal Rate of Substitution- The amount of good Y,the consumer is
willing to give up to cnsume an additional unit of good X. while leaving the total
utility unchanged.
4. Consistency of Choice- If good X is preferred over good Y in one time, then
consumer will not prefere Y over X in another time period.
5. Transitivity of choice- If good X is preferred to good Y and good Y is preferred to
good Z, then X is preferred to good Z.
Indifference Schedule :
Combinations Commodity X Commodity Y Utility
A 1 14 10
B 2 9 10
C 3 6 10
D 4 4 10
E 5 3 10
Indifference Curve: Locus of points each representing different combination of two
commodities yielding the same utility or level of satisfaction to the consumer, so that
he is indifferent as to the particular combination he consumes.
Indifference Map- A set of indifference curves is known as indifference map. It
depicts complete figure of consumer's tastes and preferences.
Properties of Indifference Curve-
a. Indifference curve has a negative slope ( i.e. slope downward from left to right) .
b. Indifference curves are convex with reference to the origin
c Indifference curves are neither intersect nor are tangential to each other.
d. Higher indifference curve represents higher level of satisfaction than a lower one.
Budget Line- It shows various combinations of two commodities which can be
purchased with a given budget at given prices of the two commodities. It is a limiting
factor for a consumer beyond which he cannot go.
Example : Suppose the income of a consumer is 1200 . Price of the good X is ₹40 and
Price of good Y is ₹30. per unit. The maximum quantity of good X that a consumer
can buy is 1200÷ 40 =30 and maximum of good Y is 1200÷30= 40.
Consumer's Equilibrium through Ordinal Approach:
A Consumer attains his equilibrium when he maximises his total utility, given his
given income and prices of the two commodities. Consumer's equilibrium can be
defined as the point where the slope of indifference curve and the budget line are
equal.
Indifference curve approach explains consumer's equilibrium with the use of
consumer's indifference map and the budget line.
The conditions needed to be fulfilled for the consumer to be in equilibrium are:
MUX 𝑃𝑋
1. MRSXY= = [This is necessary but not sufficient condition of equilibrium]
MUY 𝑃𝑌
2. The indifference curve should be convex to the origin.
The consumer cannot purchase any combination which lies to the right of the budget
line 'AB' because it is out of reach with the given income and given prices of the two
commodities. On the other hand, any combinations inside the budget line, such as
combination 'F' is within the reach of the consumer but it will provide less utility and
it lies on a lower indifference curve.
At the point 'E', the slope of the price line and the indifference curve IC2 are equal and
it fulfills the conditions of equilibrium.
