Date : 25.5 2020
Let us now shift our focus on the Ordinal Approach of the Consumer's Equilibrium
According the Ordinal Approach , a consumer can rank various combination of goods and services in order of his preference.
Indifference Curve : It refers to a graphical representation of various alternative combinations of bundles of two goods among which the consumer is indifferent.
Indifference Map : A family of Indifference curves that represents consumer preferences over all the bundle of the two goods.
Marginal Rate of Substitution (MRS) : It is rate at which the commodities can be substituted with each other , so that total satisfaction of the consumer remains the same.
MRS IS THE SLOPE OF THE INDIFFERENCE CURVE.
The MRS falls because of the Law of Diminishing Marginal Utility.
Properties of IC
1. Indiffernce curve is always convex to the origin : This is because of the diminishing MRS.
2. Indifference curve slopes downwards: This is because as a consumer consumes more of a good he has to sacrifice some units of the oter good .
3. Higher IC gives higher level of satisfaction : This is because of Monotonic preferences.
Budget line : It is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of these combinations is equal to the money income of the consumer.
Budget Set : Is the set of all possible combinations of two goods which a consumer can afford, given his income and prices in the market.
The slope of the Budget line: It will be the number of units of a commodity a consumer is willing to sacrifice for an additional unit of another commodity.
Slope = Change in Y axis/ Change in X axis
Slope of the Budget line is either Marginal rate of Exchange(MRE) or Price Ratio(Price of good A/ Price of good B)
Properties of Budget line:
1. Budget line is downward sloping
2. Budget line is a straight line
Shift in the Budget Line: A shift in the budget line can happen in two cases.
1 Effect of a change in the Income of Consumer
2. Effect of change in relative prices
Please go through the video link sent to understand the concepts in a more detailed manner
https://www.youtube.com/watch?v=ERdo5wnLQPg
Let us now shift our focus on the Ordinal Approach of the Consumer's Equilibrium
According the Ordinal Approach , a consumer can rank various combination of goods and services in order of his preference.
Indifference Curve : It refers to a graphical representation of various alternative combinations of bundles of two goods among which the consumer is indifferent.
Indifference Map : A family of Indifference curves that represents consumer preferences over all the bundle of the two goods.
Marginal Rate of Substitution (MRS) : It is rate at which the commodities can be substituted with each other , so that total satisfaction of the consumer remains the same.
MRS IS THE SLOPE OF THE INDIFFERENCE CURVE.
The MRS falls because of the Law of Diminishing Marginal Utility.
Properties of IC
1. Indiffernce curve is always convex to the origin : This is because of the diminishing MRS.
2. Indifference curve slopes downwards: This is because as a consumer consumes more of a good he has to sacrifice some units of the oter good .
3. Higher IC gives higher level of satisfaction : This is because of Monotonic preferences.
Budget line : It is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of these combinations is equal to the money income of the consumer.
Budget Set : Is the set of all possible combinations of two goods which a consumer can afford, given his income and prices in the market.
The slope of the Budget line: It will be the number of units of a commodity a consumer is willing to sacrifice for an additional unit of another commodity.
Slope = Change in Y axis/ Change in X axis
Slope of the Budget line is either Marginal rate of Exchange(MRE) or Price Ratio(Price of good A/ Price of good B)
Properties of Budget line:
1. Budget line is downward sloping
2. Budget line is a straight line
Shift in the Budget Line: A shift in the budget line can happen in two cases.
1 Effect of a change in the Income of Consumer
2. Effect of change in relative prices
Please go through the video link sent to understand the concepts in a more detailed manner
https://www.youtube.com/watch?v=ERdo5wnLQPg
KEVIN SUNIL PAPPAN
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