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Unit-4: Ordinal Utility Theory: Indifference Curve Approach

4.8 Assumptions of Indifference Curve Analysis Notes

Indifference Curve Analysis is based on the following assumptions:
1. Rational Consumer: It is assumed that the behaviour of consumer will be rational. We assume that
consumer has complete information about the circumstances related to consumption decisions.
Consumer has information about every goods and services, their prices and his monetary income.
Based on this information, consumer can decide which combination is better, and which of the
combinations provide equal satisfaction. Every consumer will try to get maximum satisfaction out
of his fixed income.
2. Ordinal Utility: Indifference curve analysis is based on the assumption of ordinal utility. It is called
ordinal utility because it is expressed in the form of ordinal numbers. Ordinal numbers are those
numbers which express the ranks in services, like first, second and third etc. According to this,
consumer can express his preferences in ranks for different combination of goods. They are not
required to express the utility of any goods in the form of cardinal numbers. A consumer expresses
by comparing the utility in the form of ‘more’ or ‘less’, and not in the form of numbers 2, 4, 6, 8 etc.
3. Diminishing Marginal Rate of Substitution: According to Baumol, “Indifference curve analysis
assumes that marginal rate of substitution diminishes.” It means, as the stock of a commodity
increases with the consumer, he substitutes it for the other commodity at a diminishing rate.
4. Non-Satiety: Consumer does not reach the level of satiety. Consumer prefers more quantity of a
commodity in comparison to less quantity, i.e. 5 sweets instead of 2. If consumer prefers the more
quantity of a particular commodity in comparison to less, then he must have that much amount of
goods that further increase in goods’ quantity will not increase the satisfaction level.
5. Consistency in Selection: There is consistency in consumer’s behaviour. It means that if at any given
time a consumer prefers ‘A’ combination of goods to ‘B’ combination, then at another time also he
will not prefer combination ‘B’ over combination ‘A’.
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If A > B, then B > A
(It reads : If A is greater than (>) B, then B cannot be greater than ( > ) A).
/
6. Transitivity: This analysis also assumes transitivity with regard to indifference and preference.
It means if a consumer prefers ‘A’ combination to ‘B’ combination and ‘B’ combination to ‘C’
combination then he will definitely prefer ‘A’ combination to ‘C’ combination. Likewise, if a consumer
is indifferent towards ‘A’ and ‘B’ and he is also indifferent towards ‘B’ and ‘C’, then he will also be
indifferent towards ‘A’ and ‘C’.

4.9 Properties of Indifference Curves

The main properties of indifferent curve are as follows:
1. An indifference Curve generally slopes downwards from left to right: An indifference curve slopes
downwards left to right, i.e., negative. This property of indifference curve is based on assumption
that if a consumer uses more quantity of one commodity, he will use less quantity of others, then
only the satisfaction from different combinations of goods will be equal.
In Fig. 4.6 IC curve shows the left to right downward sloping indifferent curve. As it is shown by
IC curve, then consumer can have equal satisfaction with combination ‘A’ and ‘B’, because in case
of combination ‘A’, if quantity of oranges is more than in combination ‘B’, then quantity of apples
is less than in combination ‘B’ consequently, slope of indifferent curve is negative as like IC curve,
i.e., sloping downward from left to right, convey to the point of origin.

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