BASIC CONCEPT OF ORDINAL UTILITY AND INDIFFRENCE CURVE

 

 Learning Contents:                                                            

·         Concept of ordinal utility

·          Concept of Indifference curve

Introduction

In the previous topic of consumer’s equilibrium- cardinal utility analysis, we have understood that utility or satisfaction is measured in numerical terms or cardinal numbers like 1,2,3,4 and so on. Just think, Do we actually measure utility in numerical terms? Do we say that drinking a cup of coffee gave me 5 utils of satisfaction? Obviously no. Normally, we say that a cup of coffee offers greater satisfaction than a cup of tea or vice versa. Prof. Hicks assumes that utility can best be described when it is ranked like first, second, etc. or compared as high or low.

“Comparison of utility (in terms of the higher or lower level of satisfaction) refers to the ordinal concept of utility”.

An example of ordinal utility is that if I have given two things to eat say Pizza and Burger I would say my first preference would be to eat pizza as it gives me more satisfaction than Burger thus my second preference is Burger.  Here, we have not measured the utility of consuming pizza and burger in utils but we are giving preferences by doing a comparison.

Indifference curve

Indifference curve refers to all those combinations of two goods that give the consumer an equal level of satisfaction or utility. Since all the combinations offer the same amount of satisfaction, the consumer prefers them equally. Hence it is named as indifference curve.

Or

An indifference curve is a graph that represents all consumption opportunities that the consumer gives an equal value.

Here is a very simple example to understand the indifference curve better. Varun has 1 unit of book and 12 units of pizza. If we ask Varun how many units of pizza that he wants to give up in order to get an additional unit of a book so that his level of satisfaction remains the same or unchanged.

Varun agrees to give up 6 units of pizza for an additional unit of book Hence, we can see two combinations of book and pizza giving equal satisfaction to Varun as follows:

1 unit of book and 12 units of pizza

2 units of book and 6 units of pizza

By asking him similar questions, we get various combinations as follows:

               Table 1: Different Combinations of Book and Pizza

Combinations	Book	Pizza
A	1	12
B	2	6
C	3	4
D	4	3

Diagrammatic Presentation of Table 1 gives the following curve

The above diagram shows an Indifference curve (IC). All points A, B, C, and D on the indifference curve indicates the different combinations such that combination A= combination B= combination C= combination D and it offers the same level of satisfaction and all combinations lying on this curve give the consumer the same level of consumer satisfaction. Indifference curve is also known as the ‘Iso-Utility Curve’ or ‘Indifference Set’.

Choose the Correct Answer

1. The ordinal concept of utility expresses utility in terms of:

a. units

b. level of satisfaction

c. constant

d. none of above

2. Diagrammatic presentation of consumer’s indifference set is called:

a. Indifference curve

b. utility curve

c. budget line

d. transformation curve

3. An indifference curve slopes down towards the right since more of one commodity and less of another result in:

a. Same satisfaction

b. Greater satisfaction

c. Maximum satisfaction

d. Decreasing expenditure

4. Ordinal utility analysis is otherwise known as

a. Gossen’s second law

b. Cardinality approach

c. Indifference curve analysis

d. Rationality approach

5. An indifference curve shows the combination of two goods that:

a. a consumer could buy with their given income

b. could be available to the consumer in a given time period.

c. would provide the consumer with the same level of satisfaction

d. could provide the consumer different level of satisfaction.

6. The slope of the indifference curve at any point reflects

a.  Income Level

b. Prices

c.Utility Level

d. Marginal rate of substitution

Answer Key

1. b 2. a 3. a 4. c 5.c 6.d

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