consumer behavior: indifference curve approach curve.pdf · according to the supporters of the...

CONSUMER CONSUMER BEHAVIOR: BEHAVIOR:

INDIFFERENCE CURVE INDIFFERENCE CURVE APPROACHAPPROACH

CLASSCLASS--FY.B.COMFY.B.COM/SYBA/SYBABY BY

ASST.PROF.AMOLASST.PROF.AMOL S. S. BAVASKARBAVASKAR

INTRODUCTIONINTRODUCTION

It was first given by Edgeworth, but he uses it to show the possibility of exchange between two persons and not to explain consumer’s demand.

Two English economist, J.R. Hicks and R.G.D. Allen in their paper „A Reconsideration of the Theory of Value‟, criticised Marshall’s cardinal utility analysis and put forward the indifference curve approach based on ordinal utility to explain consumer behavior. In 1939,Hicks reproduced the indifference curve theory in his book ‘Value and capital’.

ORDINAL UTILITYORDINAL UTILITY

According to the supporters of the indifference curve theory, utility isa psychic entity and it cannot therefore be measured inquantitative cardinal terms. Utility is psychological feeling is notquantifiable.

Ordinal utility implies that the consumer is capable of simply„comparing the different levels of satisfaction‟.

According to the ordinal utility hypothesis, while the consumer maynot be able to indicate the exact amount of utility that he derivesfrom commodities or any combination of them, but he is capableof judging whether the satisfaction obtained from a good or acombination of goods is equal to, lower than, or higher thananother.

MEANINGMEANING

Indifference curve shows different combinations of two goods that gives equal satisfaction to the consumer and consumer is indifferent in the choice of matter between them.

Definition

Koutsoyiannis, “An indifference curve is the locus of point particular combination of goods, which yield the same utility to the consumer, so that he is indifferent as to the particular combination he consumes.”

ASSUMPTIONASSUMPTION

Rational Consumer

Ordinal Utility

Diminishing Marginal Rate of Substitution

Two Goods Model

Continuity

Scale of Preference

Transitivity

Consistency in Selection

Non Satiety

Weak Ordering

EXPLANATIONEXPLANATION

Combina

tion

X Good Y Good MRSxy

A 1 15 ----

B 2 11 1:4

C 3 8 1:3

D 4 6 1:2

E 5 5 1:1

Y

XO A1 A2 A3 A4

X commodity

B1

B2

B3

B4Y c

om

modity

IC

C

C2

C3C4

L

M

N

INDIFFERENCE MAPINDIFFERENCE MAP

It consist of set of indifference curves. A

diagram showing a number of indifferent

curves corresponding to different

indifference schedules is an indifference

map. A lower IC shows lower level of

satisfaction.

Y

Y C

om

modity

XO X Commodity

IC1

IC2

IC3

MARGINAL RATE OF SUBSTITUTIONMARGINAL RATE OF SUBSTITUTION

The rate at which the consumer is prepared to exchange goods X and Y is known as marginal rate of substitution.

Or

We may define the marginal rate of substitution of X for Y as the amount of Y whose loss can just compensate the consumer for one unit gain in X.

LAW OF DIMINISHING MARGINAL RATE LAW OF DIMINISHING MARGINAL RATE

OF SUBSTITUTIONOF SUBSTITUTION

MRS of X for Y diminishes as more and moreof good X is substituted for good Y. In otherwords, as the consumer has more and moreof good X, he is prepared to forgo less andless of good Y.

MRSxy=(-) -----

▲Y

▲X

REASONS FOR DIMINISHING MRSREASONS FOR DIMINISHING MRS

There are two reasons:

First, the want for a particular good is satiable

Second, the goods are imperfect substitutes

PROPERTIES OF ICPROPERTIES OF IC

Property 1. Indifference Curve slopes downward to the right

IC Can‟t be

Y

X

IC

Y c

om

mo

dity

O X commodity

Y

X

Y

X

Y

XO O O

Property 2: IC are convex to the origin

Can‟t beIC

O a a1 a2 a3 X

X Commodity

Y

b

b1

b2

b3

Y C

om

modity

Property 3. IC can‟t Intersect and touch each

other

Property 4. A higher IC show higher level of

Satisfaction

A

B

C

O M N X

X Commodity

Y

S

R

QY c

om

modity

O a1 X

X commodity

Y

B1

B2

E

E1

A B

C

Y g

ood

Property 5: IC need not be parallel to each other

Property6: IC do not touch either X- axis or Y axis

Y

Y g

ood

O X Good X

Y

O X good X

IC3

IC2

IC2

IC in case of

Substitute

IC in case of

complimentary

goods

X good

Y g

ood

X good

Y g

oo

d

IC1

IC2

IC2

IC1

THANK YOUTHANK YOU