▶Ordinal Approach- According to this approach satisfaction derived from a commodity can only be compared or ranked, it cannot be measured in terms of numbers.
◆ It was given by Allen and Hicks.
◆It is Indifference Curve Analysis Based.
▶Indifference Curve- It is a curve which shows different combination of two Commodities which when consumed gives same level of satisfaction.
Combinations. Good X. Good Y
A. 100. 10
B. 70. 20
C. 50. 30
D. 40. 40
E. 35. 50
● As Y grow with increasing rate X will decrease at decreasing rate and hence the graph goes to form a Convex shape.
● In Indifference Curve any commodity will not tends to zero(0). Unlike PPC it will not tends to zero(0) and Decrease with decreasing rate.
▶ Features of Indifference Curve:
(i) Downward Slopping.
(ii) Convex from the point of origin.
(iii) Indifference Curve never touches axis.
(iv) Higher Indifference Curve shows higher level of satisfaction.
(v) Indifference Curve never intersect each other.
(i) Downward Slopping- For gaining one commodity we need to sacrifice another. This is to maintain same level of satisfaction.
(ii) Convex from the point of origin- Decreasing Marginal Rate of Substitution.
As more and more unit of one commodity is consumed we need to sacrifice less and less of another.
▶Marginal Rate of Substitution (MRS)- It is the ratio which shows how much of one commodity is sacrificed for gaining additional unit of another.
◆It is the slope of Indifference Curve.
Combinations. Good X. Good Y. MRS
A. 100. 10. --
B. 70. 20. 30/10=3
C. 50. 30. 20/10=2
D. 40. 40. 10/10=1
E. 35. 50. 5/10=0.5
(iii) Indifference Curve never touches axis- If Indifference Curve touches axis it means one commodity is zero and as we are studying Ordinal Approach (in which we compare) it is not possible to compare something with zero.
(iv) Higher Indifference Curve shows higher level of satisfaction-. Please see the graph.
(v) Indifference Curve never intersect each other- It is not possible that after consuming a commodity a consumer gets two satisfaction. Hence, Indifference Curve never intersect each other
▶Monotonic Preference- It is the behaviour of a consumer to represent strict behaviour related to consumption habit. A consumer never desires to sacrifice Commodity.
▶Budget Line- It is a line which shows different combination of two commodities which can be purchased assuming income constant and fully utilised.
◆ It is also known as Price Line.
[Q.] Income= 100
Px= 20 ( Dairy Milk)
Py= 10 ( 5 star)
Combinations. Dairy Milk. 5 star
A. 5. 0
B. 4. 2
C. 3. 4
D. 2 6
E. 1. 8
F. 0. 10
◆ Slope of Budget Line-= ∆Y/∆X = Px/Py
▶ Assumptions:
(i) Income of the consumer is Constant and fully utilised.
(ii) Price of both the commodities are constant.
(iii) Demand of consumer is Constant.
▶Shift in Budget line-
Direction- Right ward, Cause- Increase in income of consumer.
Direction- Leftward, Cause- Decrease in Income of consumer.
▶ Rotation in Budget line-
Direction- Leftward, Cause- Increase in price of single commodity.
Direction- Right ward, Cause- Decrease in price of single commodity.
Here consumer will be at Equilibrium when budget line acts as a tangent to indifference curve. At this point of tangency slope of Indifference Curve (MRS) is equal to slope of Budget Line (Px/Py).
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