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Unit-4: Ordinal Utility Theory: Indifference Curve Approach

In Fig. 4.40 (A), apples are shown on axis OX while oranges are on axis OY. In Fig. 4.40 (B), apples are Notes
shown on axis OX while income is on axis OY. Let’s assume that the cost of apple is 1 per unit and
the cost of orange is 0.50 per unit. When the income of consumer is 4.00 then he buys 3 apples and
2 oranges in ICC point E. When income rises by 6.00, he buys 4 units of apples and 4 units of oranges
as indicate by point E on Income Consumption Curve. And he buys 5 units of apples and 6 units of
1
oranges if his income increases by 8.00 and this also indicates by point E on Income Consumption
2
Curve. All these levels of income are shown on Fig. 4.40 (B) by drawing 3 lines on axis OX.

Fig. 4.40

Y
20 (A)
18
16
14
Oranges 12 ICC
10
8
6 E 2
4 E 1
2 E
O X
1 2 3 45 6 78 9 10
Apples

Y
(B)
20
18
16 E'
14
Income (`) 12 Engel’s Curve
10
8
6 B C
4 A
2 E
O X
1 2 3 45 6 78 9 10
Apples

Point A indicates that on 4.00 income, consumer buys 3 apples. He buys 4 apples on point B if his
income is 6.00 and if income is 8.00, he buys 5 apples on point C. By mixing the point A, B and C we
get EC curve and this is Engel’s Curve which represents the equilibrium quantity of apples on various
price income.

4.35 Criticism of Demand Theory

Some economists criticize the demand theory as unrealistic by giving some exceptions. This section
primarily describes the alleged exceptions of demand theory and later gives details of observations
which tell the demand theory unrealistic.

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