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Mahatma Joytiba Phule Rohilkhand University
Lecture Notes
Managerial Economics
ORDINAL mileage APPROACH preface The Ordinal Utility approach is grounded on the fact that the mileage of a commodity can not be measured in absolute volume, but still, it'll be possible for a consumer to tell subjectively whether the commodity derives more or less or equal satisfaction when compared to another. objects After reading this unit you'll be suitable to understand incuriosity wind analysis dwindling borderline rate of negotiation parcels of incuriosity angles incuriosity wind chart Budget line Consumer’s equilibrium Effect of income and price change in consumer’s equilibrium Income effect and negotiation effect of inferior goods Complementarily and substitutability The extreme choices
derivate of individual demand wind Comparison of ordinal and cardinal mileage approach operation of incuriosity wind analysis MEANING OF incuriosity wind incuriosity wind is defined as the locus of points on the graph each representing a different combination of two substitute goods, which yield the same mileage or position of satisfaction to a consumer. The combinations of goods give equal satisfaction to a consumer. thus, a consumer is indifferent between any two combinations of two goods when it comes to making a choice between them. When these combinations are colluded on the graph, the performing wind is called incuriosity wind. This wind is also called as iso- mileage wind or equal mileage wind.7.4 incuriosity wind ANALYSIS When a consumer consumes colorful goods and services, also there are some combinations, which give him exactly the same total satisfaction. The graphical representation of similar combinations is nominated as incuriosity wind. incuriosity wind refers to the graphical representation of colorful indispensable combinations of packets of two goods among which the consumer is indifferent. Alternatively, incuriosity wind is a locus of points that show similar combinations of two goods which give the consumer same satisfaction. Let us understand this with the help of following incuriosity schedule, which shows all the combinations giving equal satisfaction to the consumer. Table incuriosity Schedule Combination of Apples and Bananas Apples
and no lower of the other good as compared to the other pack. Example Consider 2 goods Apples( A) and Bananas( B) a) Suppose two different packets are 1st( 10A, 10B); and 2nd( 7A, 7B). Consumer’s preference of 1st pack as compared to 2nd pack will be called monotonic preference as 1st pack contains further of both apples and bananas. b) If 2 packets are 1st( 1 OA, 7B); 2nd( 9A, 7B). Consumer’s preference of 1st pack as compared to 2nd pack will be called monotonic preference as 1st pack contains further of apples, although bananas are same. incuriosity Chart incuriosity Chart refers to the family of incuriosity angles that represent consumer preferences over all the packets of the two goods. An incuriosity wind represents all the combinations, which give same position of satisfaction. still, every advanced or lower position of satisfaction can be shown on different incuriosity angles. It means, horizonless number of incuriosity angles can be drawn Borderline Rate of Negotiation( MRS) madam refers to the rate at which the goods can be substituted with each other, so that total satisfaction of the consumer remains the same. For illustration, in the illustration of apples( A) and bananas( B), MRS of ‘ A ’ for ‘ B ’, will be number of units of ‘ B ’, that the consumer is willing to immolate for an fresh unit of ‘ A ’, so as to maintain the same position of satisfaction. MRSAB = Units of Bananas( B) willing to Immolate Units of Apples( A) willing to Gain MRSAB = “ B/ ” A MRSAB is the rate at which a consumer is willing to give up Bananas for one
more unit of Apple. It means, MRS measures the pitch of incuriosity wind. It must be noted that in fine terms, MRS should always be negative as numerator( units to be offered) will always have negative value. still, for analysis, absolute value of MRS is always considered. Table madam between Apple and Banana Combination Apples A) Banana B) MRSAB P 1 15 – Q 2 10 5B1 A R 3 6 4B1A S 4 3 3B1A T 5 1 2B1 A WHY MRS DIMINISHES? madam falls because of the law of dwindling borderline mileage. In the given illustration of apples and bananas, Combination ‘ P ’ has only 1 apple and, thus, apple is fairly more important than bananas. Due to this, the consumer is willing to give over more bananas for an fresh apple. But as he consumes further and further of apples, his borderline mileage from apples keeps on declining. As a result, he's willing to give up lower and lower of bananas for each apple.
