Theory of Consumer Behaviour | Class 12 Economics Notes

2.1.2 Ordinal Utility Analysis

Ordinal Utility Analysis assumes that utility cannot be measured in numbers but can be ranked or ordered. Consumers can say which bundles of goods they prefer or whether they are indifferent between bundles. This leads to the concept of indifference curves, which join all bundles that provide the consumer with the same level of satisfaction. On an indifference curve, the consumer is indifferent among all points. The curve slopes downward because to gain more of one good, the consumer must give up some quantity of the other good to maintain the same utility level. The rate at which the consumer is willing to substitute one good for another while remaining on the same indifference curve is called the Marginal Rate of Substitution (MRS). The Law of Diminishing Marginal Rate of Substitution states that as the consumer has more of one good, the amount of the other good they are willing to give up decreases. This causes the indifference curve to be convex to the origin. In the special case of perfect substitutes, the MRS remains constant and the indifference curve is a straight line.

📊 Diagram: See figure_5, table_2, table_3, and figure_6: Figure 2.3 shows an indifference curve joining points of equal satisfaction; Table 2.2 shows diminishing MRS with increasing bananas; Table 2.3 shows constant MRS for perfect substitutes; Figure 2.4 depicts straight-line indifference curve for perfect substitutes.

🧪 Activity: No specific activity in this section.

🔗 Connection: Leads to discussion on shape and properties of indifference curves.

Table on page 5 (5×4)

Table on page 5 (5×4)