ORDINAL UTILITY ANALYSIS.

 A measure of Utility Analysis expressed in terms of

rankings of preferred combinations of commodities
rather than through the assignment of absolute values is
called as Ordinal Utility Analysis or Indifference Curve.

 It was introduced by a Russian economist Slustsky in

1915 and later J.R. Hicks and R.G.D. Allen in 1928
developed more ideas about the Ordinal Utility Analysis
or Indifference Curve Analysis.

 They base the theory of Consumption on the;

1. Scale of Preferences
2. Ordinal measurement of utility
 INDIFFERENCE CURVE ANALYSIS
 An Indifference Curve Analysis explain various
combinations of goods which yield equal satisfaction to
the consumer.

 It reflect Subjective information about consumer

preferences for two products.

Assumptions of Indifference Curve Analysis

1. Ordinal Utility
2. Diminishing Marginal Rate of Substitution
3. Consistency
4. Substitutable Goods
 INDIFFERENCE SCHEDULE
Combinations Apples Mangoes

A 15 1

B 11 2

C 8 3

D 6 4

E 5 5
 INDIFFERENCE CURVE
Y
15 A

Apples

11 B

C
8
D
6 E
5
4

2
X
1 2 3 4 5 Mangoes
 INDIFFERENCE MAP
 A set of Indifference Curves on a graph showing
combinations of apples and mangoes which represent
greater and lesser satisfaction.

 A set of Indifference Curves, each representing a

different level of utility, that together show the
preferences of consumer.

 The combinations of commodities lying on higher

Indifference Curve gives higher level of satisfaction
while combinations on a lower Indifference Curve gives
lower satisfaction.
 INDIFFERENCE MAP

Combination A
is preferred to B.
Combination B is
preferred to D.
Apples
D

B A
IC3

IC2

IC1

Mangoes
 MARGINAL RATE OF SUBSTITUTION
 Marginal Rate of Substitution shows that at what rate a
consumer is willing to substitute one commodity for
another in his/her consumption pattern.

 It is a rate or ratio at which goods X and Y are to be

exchanged.

 In Hicks words “the marginal rate of substitution of X

for Y measure the number of units of Y that must be
sacrificed for unit of X gained so as to maintain a
constant level of satisfaction.

MRSxy = y
x
 MARGINAL RATE OF SUBSTITUTION

Combinatio Apples Mangoes MRS

ns of M for A

A 15 1 ___

B 11 2 4:1
C 8 3 3:1
D 6 4 2:1
E 5 5 1:1
 DIMINISHING MARGINAL RATE OF
SUBSTITUTION
 As the consumer has more and more units of good X,
he is prepared to forgo less and less of good Y.

 This trend cause MRS to diminish and IC to be

downward sloping.

 As the table shows that at the start MRS of M for A is

4:1 it falls to 3:1 in combination C, 2:1 in combination
D and 1:1 in combination E which show that MRS is
decreasing as consumer go further on indifference curve
 DIMINISHING MARGINAL RATE OF
SUBSTITUTION

16 A
14 MRS = 4
12 -4
B
Apples 10 1
-3
8 C MRS = 2
1
6 -2
D
1 -1 E
4
1
2

1 2 3 4 5
Mangoes
PROPERTIES OF INDIFFERENCE CURVE

 Downward or Negative Sloping

 Convex to the Origin

 Higher IC, higher is the level of satisfaction and Vice,

Versa.

 Non-intersecting

 IC cannot touch the Horizontal or Vertical Axis