Theory of consumer behaviourcardinal approach limitations

Assumptions cardinal approach extremely doubtful- The satisfaction derived from various commodities cannot be measured Utils concept provided by Walras is not satisfactory Constant Utility of money is not realistic- money cannot not be taken as measuring rod as its own utility changes LDMU is an introspection and is psycological and taken from granted

Indifference curves
Originally Edgeworth1881.Refinedby PARETO 1906.Systematic application by JR HICKS and RGD ALLEN 1934. HICKS 1939( value and Capital) Concept of Scale of preference- Ordinal Utility Level of satisfaction not amount of satisfaction All market baskets that provide a given consumer the same amount of satisfaction or utility Scale of preference:Combinations of goods and services from market basket; level of satisfactions: ranking order(Ist; IInd and IIIrd so on and so forth)

Indifference Schedule(IS)
A list of alternative combinations in the stocks of two goods which yields equal satisfaction to the consumer To draw IS- combinations: two goods; marginal rate of substitution(MRS) 5Combinations : apples, bananas 1a;12b- 2a;8b- 3a;5b-4a;3b-5a;2b MRS: -4/1= -4; -3/1=-3;

Assumptions relating to IC
Rationality-consumer is rational Utility is ordinal-Consumer can rank her preference according to the satisfaction of each basket Diminishing MRS- slope of IC Consistency and transitivity of choice

Indifference Curve(IC) and IC Map

IC is the locus of points- particular combinations or bundle of goods which yield the same level of satisfaction so that he is indifferent to a particular level IC Map all indifference curve which rank the preference of the consumer. Higher IC higher level of satisfaction

Indifference Curve
Four propertiesHigher indifference curve are better Indifference Curves do not intersect Indifference curve slope downwards Indifference curves are convex to the origin

Properties
Higher IC Better-Combination of goods, ranking and MRS ICs do not intersect- violates the principles of more is better Slope downward- tradeoff from market basketsquantity of one increases the other falls Convex to the origin-slope decreases as the consumer moves along the IC- Diminishing MRS

Substitutes and Complements

Convex to the origin implies goods are substitutes but not perfect substitutes If substitutes IC is st. line with negative slopeconsumer spends all his income on one commodity- it is a corner solution for consumer- monomania( Not happening in the real world) If Compliments IC is a right angle Ic analysis breakes down