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Unit 6: Consumer Behaviour: Ordinal Approach




          The vertical movement from point a on the lower indifference curve IC  to point b and Quantity   Notes
                                                                   1
          of X on the upper indifference curve IC , means an increase in the quantity of Y by ab, the quantity
                                         2
          of X remaining the same (OX). Similarly, a horizontal movement from point a to d means a greater
          quantity (ad) of commodity X, quantity of Y remaining the same (OY). The diagonal movement
          from a to c, means a larger quantity of both X and Y. Unless, the utility of additional quantities of
          X and Y are equal to zero, these additional quantities will yield additional utility.

          Therefore, the level of satisfaction indicated by the upper indifference curve (IC ) would always
                                                                          2
          be greater than that indicated by the lower indifference curve (IC ).
                                                              1
          6.1.3 Budget Line

          The budget line is also known as the price line, the consumption possibility line or the price
          opportunity line. It represents different combinations of two goods X and Y which the consumer
          can buy by spending all his income.


                 Example: A consumer having ` 1200 as income can buy 600 units of Y at ` 2 per unit or

          300 units of X at ` 4 per unit as shown in figure below. The straight line joining the two points A
          and B is called the budget line.






















                                            Budget line
          At any point on AB, the consumer spends all his income but point C is unattainable. At point D
          or any other point in DOAB he does not spend all his income.




              Task    Task Assign a measure of utility you are putting into your various subjects. Do
                      your study habits follow the principle of rational choice?


          6.2 Marginal Rate of Substitution

          MRS is the rate at which one commodity can be substituted for another, the level of satisfaction
          remaining the same.



                 Example: The indifference curve is I1 (as shown in figure below). A person would receive
          the same utility (satisfaction) from consuming 4 hours of work and 6 hours of leisure, as they
          would if they consumed 7 hours of work and 3 hours of leisure.




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