Theory of Ordinal
Utility/Indifference Curve Analysis:
The indifference curve indicates the various
combinations of two goods which yield equal satisfaction to the consumer. By
"An indifference curve shows all the various combinations of two
goods that give an equal amount of satisfaction to a consumer".
indifference curve analysis approach was first introduced by Slustsky, a Russian
Economist in 1915. Later it was developed by J.R. Hicks and R.G.D. Allen in the
These economist are the of 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.
(ii) The utility can be measured.
of view is that utility is purely subjective and is immeasurable. Moreover an
individual is interested in a combination of related goods and in the purchase
of one commodity at one time. So they base the theory of consumption on the
scale of preference and the ordinal ranks or orders his preferences.
utility theory or the indifference curve analysis is based on four main
(i) Rational behavior of the consumer: It is
assumed that individuals are rational in making decisions from their
expenditures on consumer goods.
(ii) Utility is ordinal: Utility cannot be
measured cardinally. It can be, however, expressed ordinally. In other
words, the consumer can rank the basket of goods according to the
satisfaction or utility of each basket.
(iii) Diminishing marginal rate of substitution:
In the indifference curve analysis, the principle of diminishing marginal
rate of substitution is assumed.
(iv) Consistency in choice: The consumer,
it is assumed, is consistent in his behavior during a period of time. For
insistence, if the consumer prefers combinations of A of good to the
combinations 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
(iv) Consumer’s preference not self contradictory:
The consumer’s preferences are not self contradictory. It means that if
combinations A is preferred over combination B is preferred over C, then
combination A is preferred over combination A is preferred over C.
Symbolically it can be expressed:
If A > B and B > C, then A >
(v) 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
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:
16 Kilograms of Rice
Plus 2 Kilograms of Wheat
12 Kilograms of Rice
Plus 5 Kilograms of Wheat
11 Kilograms of Rice
Plus 7 Kilograms of Wheat
10 Kilograms of Rice
Plus 10 Kilograms of Wheat
9 Kilograms of Rice
Plus 15 Kilograms of Wheat
It is 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.
Figure/Diagram of Indifference Curve:
The consumer’s preferences can be shown in a diagram
with an indifference curve. The indifference showing nothing about the absolute
amounts of satisfaction obtained. It merely indicates a set of consumption
bundles that the consumer views as being equally satisfactory.
In fig. 3.1 we measure the quantity of wheat along
X-axis (in kilograms) and along Y-axis, the quantity of rice (in kilograms). IC
is an indifference curve.
It is shown in the diagram that a consumer may buy
12 kilograms of rice and 5 kilograms of wheat or 9 kilograms of rice and 15
kilogram of wheat. Both these combinations are equally preferred by him and he
is indifferent to these two combinations. When the scale of preference of the
consumer is graphed, by joining the points a, b, c, d, e, we obtain an
Indifference Curve IC.
Every point on indifference curve represents a
different combination of the two goods and the consumer is indifferent between
any two points on the indifference curve. All the combinations are equally
desirable to the consumer. The consumer is indifferent as to which combination
he receives. The Indifference Curve IC thus is a locus of different combinations
of two goods which yield the same level of satisfaction.
A graph showing a whole set of indifference curves
is called an indifference map. An indifference map, in other words, is
comprised of a set of indifference curves. Each successive curve further
from the original curve indicates a higher level of total satisfaction.
fig. 3.2 three indifference curves IC1, IC2 and IC3
have been shown. The various combinations of goods of wheat and rice lying on IC1
yield the same level of satisfaction to the consumer. The combinations of goods
lying on higher indifference curve IC2 contain more both the goods
wheat and rice. The indifference curve IC2 gives more satisfaction to
the consumer than IC1. Similarly, the set of combinations of two
goods on IC3 yields still higher satisfaction to the consumer than IC2.
In short, the further away a particular curve is from the origin, the higher
level of satisfaction it represents.
It may here be noted that while an indifference
curve shows all those combinations of wheat and rice which provide equal
satisfaction to the consumer but it does not indicate exactly how much
satisfaction is derived by the consumer from these combinations. It is because
of the fact that the concept of ordinal utility does not involve the qualitative
measurement of utility.