Concept of Ordinal Utility:
The indifference curve indicates the various combinations of two goods which yield equal satisfaction to the consumer. By definition, an indifference curve shows all the various combinations of two goods that give an equal amount of satisfaction to a consumer. The indifference curve analysis approach was first introduced by Slustsky, a Russian economist in 1915. Later on it was developed by J.R. Hicks and R.G.D. Allen in the year 1928. These economists are of the view that it is wrong to base the theory of consumption on two assumptions; (i) that there is only one commodity which a person will buy at one time, and (ii) the utility can be measured. Their point of view is that utility is purely subjective and is immeasurable. Moreover an individual is interested in a combination of related goods and not in the purchase of one commodity at one time. So they base the theory of consumption on the scale of preference. According to the ordinal theorists, a consumer simply ranks or orders his Preferences. It is only an expression of the consumer’s preference for one commodity over another The ordinal utility theory or the indifference curve analysis is based on four main assumptions:
Assumptions of Indifference Curve Analysis:
(1) Rational behavior of the consumer. It is assumed that individuals are rational in making decisions from their expenditures on consumer goods.
(2) Utility is ordinal. Utility cannot be measured cardinally. It can be, however, expressed ordinally. In other words, the consumer can rank his various combinations of goods according to the satisfaction or utility of each basket.
(3) Diminishing marginal rate of substitution. In the indifference curve analysis, the principle of diminishing marginal rate of substitution is assumed.
(4) Consistency in choice: The consumer, it is assumed, is consistent in his behavior during a period of time. For instance, if the consumer prefers combination of A of goods to combination B of goods, he then remains consistent in his choice. His preference, during another period of time does not change. Symbolically, it can be expressed as: If A> B, then
B>A
(5) Consumer’s preferences not self contradictory. The consumer’s preferences are not self contradictory. means that if combination A is preferred over combination B and combination B is preferred over C, then combination A is preferred over C. Symbolically it can be expressed, If A
> B and B > C, then A> C.
(6) Goods Consumed are substitutable. The goods consumed by the consumer are substitutable. The utility can be maintained at the same level by consuming more of some goods and less of the, other. There are many combinations of the two commodities which are equally preferred by a consumer and he is indifferent as to which of the two he receives. For example, a person has a limited amount of income which he wishes to spend on two commodities, rice and wheat. Let us suppose that the following commodities are equally valued by him:
|
Combinations |
Commodity Rice in Kgms |
|
Commodity Wheat in Kgms |
|
a = |
16 |
+ |
2 |
|
b = |
12 |
+ |
5 |
|
c = |
11 |
+ |
7 |
|
d = |
10 |
+ |
10 |
|
e = |
9 |
+ |
15 |
It is a matter of indifference for the consumer as to which combination he buys. He may buy 16 kilograms of rice and 2 kilograms of wheat or 9 kilograms of rice and 15 kilograms of wheat. All these combinations are equally preferred by him. An indifference curve thus is composed of a set of consumption alternatives each of which yields the same total amount of satisfaction. These combinations can also be shown by an indifference curve.
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