consumer behavior: indifference curve approach curve.pdf · according to the supporters of the...
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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
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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’.
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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.
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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.”
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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THANK YOUTHANK YOU