Ordinal Utility Approach of

consumer behaviour
Indifference Curves
Budget Line
Consumer Equilibrium
• Presented by Hick and is also known as Hicksian
Approach of Consumer Behaviour.
• The main premise of this approach is that utility
cannot be measured objectively, rather utility
is a subjective concept.
• Cardinal/Marshallian Approach of consumer
behaviour was criticized on this ground that it
considered utility to be a measureable concept
Two Concepts of Ordinal Utility Approach

• Indifference Curves
• Budget Line/Income Line
• Combining these two concepts then we arrive
at the equilibrium of the consumer.
 Indifference Curves
• What is an Indifference Curve?
• An indifference curve is a curve(Contour of points)
that represents all the combinations of goods
that give the same satisfaction to the consumer.
• Since all the combinations give the same amount
of satisfaction, the consumer prefers them
equally. Hence the name indifference curve.
• Indifferent in english means he does not
differentiate.
• An indifference curve depicts various
combinations of two goods, which give the
same level of satisfaction or utility to the
consumer.
• A higher indifference curve depicts a larger
amount of satisfaction than a lower one
because it represents a greater quantity of
good x or y or more of both x and y.
• An indifference curve is negatively sloped.
• An indifference curve is convex to the origin.
(Because of Diminishing MU), MRSxy is diminishing.
• Indifference curves cannot (Never) intersect.
• When goods x and y are perfect substitutes, the
indifference curve is a downward sloping straight
line and the MRSxy is constant.
• When goods x and y are perfect complements, the
indifference curve is an L Shaped Indifference
curve.
 Example

Combination Apples Banana

A 22 17
B 14 20
C 10 26
D 9 41
E 7 80
 Indifference Curve Map
• Shows different indifference curves.
• Each highr indifference curves shows higher
level of satisfaction
Indifference Curve Map
• We can also show different indifference
curves.
• All choices on I2 give the same utility. But, it
will be a higher net utility than indifference
curve I1.
• I4 gives the highest net utility. Basically, I4
would require higher income than I1.
 Budget line
• A budget line shows the combination of goods that can be purchased with your
current income.
• Pay a price for each good and this needs money income
• Budget Equation: Y = P1*X1+P2*X2 + P3*X3 +……….+ Pn*Xn
• 100 Rs Income, price apple 1 Rs. Price of Banana 2Rs.
• How many apples can I have if I spend all the money of apples? 100 Apples
• How many bananas can I have if I spend all the money on bananas? 50 Bananas
• 100 Rs Income, price apple 2 Rs. Price of Banana 4 Rs.
• 200 Rs Income, price apple 1 Rs. Price of Banana 2Rs.

• Budget Line depends upon

– Prices of different goods (Rotates on X or Y Axis)
– Income of Consumer (Shifts upward and downward due to change in income)
• If an apple costs £1 and a banana £2, the
above budget line shows all the combinations
of the goods which can be bought with £40.
For example:
• 20 apples @ £1 and 10 bananas @£2
• 10 apples @£1 and 15 bananas @£2
 Optimal choice of goods for
consumer/Consumer Equilibrium
• Given a budget line of B1, the consumer will
maximise utility where the highest indifference
curve is tangential to the budget line (20 apples,
10 bananas)
• Given current income – IC2 is unobtainable.
• IC3 is obtainable but gives less utility than the
higher IC1
• The optimal choice of goods can also be shown
with the Equi-marginal principle
 Income-consumption curve
As income rises, you
can afford to consume
on higher indifference
curves. This optimal
choice will shift to the
right. This we can plot
consumption as income
rises.