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BEHAVIOUR
CARDINAL AND ORDINAL UTILITY
ANALYSIS
TUn= U1+U2+U3+.+Un
Where TU n = total utility of n units
U1 = utility of the 1st unit
Assumptions:
Utility can be measured in the cardinal number system.
MU of the money remains constant.
MU of every commodity is independent.
The unit of the good must be standard and as of same
quality and size.
There should be no change in taste during the process
of consumption
There must be continuity in consumption
There should be no change in the price of the substitute
goods.
No change in the income of the consumer.
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Explanation:
As more and more quantity of a
commodity is consumed, the intensity if
desire decreases and also the utility
derived from the additional unit.
MU X MUY
PX PY
Price
D
Qx
0
Consumer
Surplus
14 Market Price
Demand Curve
Actual
Expenditure
0 1 2 3 4 5 6
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Consumer Surplus and Market Price
Rationality :
Aim to maximize utility under condition of
certainty.
Complete Ordering:
All possible goods can be offered into preferred.
Consistency:
If consumer prefers bundle B to bundle A at the
same time he does not prefer bundle A to bundle B.
Trasivity:
If Commodity basket A is preferred to B is
preferred to C implies that, A is preferred to C.
Non Satiety:
Bigger is preferred to a small bundle.
Scale of preferences
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The weakness of Alfred Marshalls approach was related to its
cardinal measurement of utility
Indifference Schedule :
A 15 1
B 11 2
C 8 3
D 6 4
E 5 5
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Indifference curve IC shows all possible combinations of apples and
mangoes between which a person is indifferent. Point A shows
consumption bundle consisting of 15 apples and one mango. Moving
from point A to Point B, we are willing to give up 4 apples to get a
second mango (total utility is the same at points A and B).
16
A
14
12
B
10
Apples
C
8
D
6 E
IC
4
2
0
0 1 2 3 4 5 6
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Mangoes
Indifference Map :
A graph showing a whole set of indifference curves is called an
indifference map. All points on the same curve give equal level of
satisfaction, but each point on higher curve gives higher level of
satisfaction.
25
20
15
Apples
10
IC3
5
IC2
IC1
0
0 1 2 3 4 5
Mangoes
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PROPERTIES OR CHARACTERISTICS OF INDIFFERENCE
CURVES
MRSxy = Y X
Where X represents change in X and Y change in Y. The above
equation represents the slope of the indifference curve at a
particular point Chitkara Business School
Diagram
Slope of price
Quantity of Y
line = Px/Py
B
Quantity of X
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Shifting Budget Lines (Figure 5.7)
R
120
A A
Quantity of Y
Quantity of Y
100 100
F
80
Z B N C B D
160 200 240 125 200 250
Quantity of X Quantity of X
14
12
10
Apples
8
E
6 IC
4
Price Line
2
0
0 5 10 15 20
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Mangoes
Consumer equilibrium is attained when, given his budget constraint,
the consumer reaches the highest possible point on the indifference
curve. The maximum satisfaction is yielded when the consumer
reaches equilibrium at the point of tangency between an indifference
curve and the price line. At point E, the price line is tangent to the
indifference curve.
50
45 A
40 B D
Quantity of pizzas
R E IV
30
III
20
C
15 II
T
10
I
0 10 20 30 40 50 60 70 80 90 100
Quantity of burgers
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