Editing Content :: Admin Scraper

Chapter

Content type

Position

Value

Therefore the individual will not be willing to pay as much for each additional unit and this results in a downward sloping demand curve. At a price of Rs. 40 th per unit x, individual’s demand for x was 5 units. The 6 unit of commodity x will be worth less than the 5 unit. The individual will be willing to buy the 6th unit only when the price drops below Rs. 40 per unit. Hence, the law of diminishing marginal utility explains why demand curves have a negative slope. 2.1.2 Ordinal Utility Analysis Cardinal utility analysis is simple to understand, but suffers from a major drawback in the form of quantification of utility in numbers. In real life, we never express utility in the form of numbers. At the most, we can rank various alternative combinations in terms of having more or less utility. In other words, the consumer does not measure utility in numbers, though she often ranks various consumption bundles. This forms the starting point of this topic – Ordinal Utility Analysis. A consumer’s preferences over the set of available bundles can often be represented diagrammatically. We have already seen that the bundles available to the consumer can be plotted as points in a two- A dimensional diagram. The points representing bundles which give the consumer equal utility can generally be joined to obtain a curve like the one in Figure 2.3. The consumer is said to be indifferent on the different bundles because each point of the bundles give the consumer equal utility. Such a curve joining all points representing bundles among which Indifference curve. An indifference curve joins 11 the consumer is indifferent is called all points representing bundles which are T an indifference curve. All the points considered indifferent by the consumer. e such as A, B, C and D lying on an e y a o indifference curve provide the consumer with the same level of satisfaction. o C It is clear that when a consumer gets one more banana, he has to forego r n some mangoes, so that her total utility level remains the same and she remains u on the same indifference curve. Therefore, indifference curve slopes downward. e r The amount of mangoes that the consumer has to forego, in order to get an additional banana, her total utility level being the same, is called marginal rate of substitution (MRS). In other words, MRS is simply the rate at which the consumer will substitute bananas for mangoes, so that her total utility remains constant. So, MRS =|∆Y / ∆X | 3. One can notice that, in the table 2.2, as we increase the quantity of bananas, the quantity of mangoes sacrificed for each additional banana declines. In other words, MRS diminishes with increase in the number of bananas. As the number 3|∆Y / ∆X |= ∆Y / ∆X if (∆Y / ∆X) ≥0 = −∆Y / ∆X if (∆Y / ∆X) <0 MRS =|∆Y / ∆means that MRS equals only the magnitude of the expression ∆Y /∆X. If ∆Y / ∆X = −3/1 means MRS=3. Reprint 2026-27