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Unit 6: Consumer Behaviour: Ordinal Approach

y Notes

Higher Utility

Unit of Y

Lower Utility

x

6.1.1 Assumptions

The following assumptions about the consumer psychology are implicit in indifference curve
analysis:
1. Transitivity: If a consumer is indifferent to two combinations of two goods, then he is
unaware of the third combination also.

2. Diminishing marginal rate of substitution: The rarer the availability of a good, the greater
is its substitution value. For example, water has a high substitution value as it is a scarce
resource.
3. Rationality: The consumer aims to maximise his total satisfaction and has got complete
market information.

4. Ordinal utility: Utility in this approach is not measurable. A consumer can only specify his
preference for a particular combination of two goods, he cannot specify how much.

6.1.2 Properties of Indifference Curve

Indifference curves have the four basic characteristics:
1. Indifference curves have a negative slope

2. Indifference curves are convex to the origin
3. Indifference curves do not intersect nor are they tangent to one another
4. Upper indifference curves indicate a higher level of satisfaction.
These characteristics or properties of indifference curves, in fact, reveal the consumer’s behaviour,
his choices and preferences. They are, therefore, very important in the modern theory of consumer
behaviour. Now, we will observe their implications.

Indifference Curves have a Negative Slope

In the words of Hicks, “so long as each commodity has a positive marginal utility, the indifference
curve must slope downward to the right”.

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