Ordinal approach to consumers behavior

1.

How to analyze the demand
and consumer behavior?
2
1

2.

…it is difficult to link the subjective preferences
of consumers to changes in prices, income and
other market variables that are objective…
2

3.

The ordinal approach to the consumer balance
3

4.

The combinations of goods
should be arranged in the order of preference
4

5.

assumption: consumers can define packages of
goods and services in the order of preferences
5

6.

TU
f(
X
X
)
1
,X
2
,....,
n
Function of total
utility
The quantity of goods
consumed in the
accounting period
6

7.

TU
f(X,Y
)
Function of total
utility
The quantity of goods (or packages of goods)
consumed in the accounting period
7

8.

TU
f(X,Y
)
This equation describes some surface in threedimensional space
8

9.

9

10.

Indifference curve is the sum of all combinations of
goods X and Y, which provide the same level of total
utility or satisfaction
Indifference map is a chart that reflects indifference
curves
10

11.

Quantity of Y, consumed for some definite period
Curves
U1, U2, U3absolute
- three
Measurement:
multitudes
of the
many possible
inclination
of indifference
levels of utility from consumption of
curve at the point of
different combinations of X and Y for
consumption
the
same period
Marginal rate of substitution X by Y
The rate at which the consumer is
(MRSху) - the number of Y units
willing to make such substitution is
consumer decline to purchase one
called the marginal rate of substitution
additional unit of X under the condition
of constant total utility
Quantity of X, consumed for some definite period
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12.

Is there a correlation between the marginal
utility and marginal rates of substitution?
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13.

Quantity of Y, consumed for some definite period
] consumption of Y is reduced by ∆Y
that leads to the loss of utility - ∆Y MUy
units of utility
Quantity of X, consumed for some definite period
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14.

Quantity of Y, consumed for some definite period
But total utility remains unchanged,
loss from -∆Y is offset by the
increased consumption of X
У
MU
X
MU
y
x
(
Х М
U
y)
MU x
Y
X
MU y
The inclination
of the
indifference
curve
Quantity of X, consumed for some definite period
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15.

Quantity of Y, consumed for some definite period
Quantity of X, consumed for some definite period
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16.

Quantity of Y, consumed for some definite period
The utility measurement:
∆Uу = - ∆У MUy = - 4,2 MUy
The lost utility is offset by two more
units of X
∆Uх = ∆Х MUх = 2 MUх
Quantity of X, consumed for some definite period
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17.

Quantity of Y, consumed for some definite period
As total utility at B = total utility at A, than:
2 MUх = - 4,2 MUy
MU x 4,2
2,1
MU y
2
Quantity of X, consumed for some definite period
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18.

Quantity of Y, consumed for some definite period
Switch from В to С:
MRS XY
MU x 2,8
1,4
MU y
2
Quantity of X, consumed for some definite period
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19.

Quantity of Y, consumed for some definite period
Switch from С to D:
MRS XY
MU x 1,5
0,75
MU y
2
Quantity of X, consumed for some definite period
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20.

Quantity of Y, consumed for some definite period
The more X is consumed, the less is its
marginal utility in comparison with the
Y marginal utility, i.e. MRSxy decreases
with increasing consumption of X
Quantity of X, consumed for some definite period
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21.

Constantly decreasing MRS is a logical result of the
assumption that the marginal utility of the product
decreases as we acquire more of it
Ех:
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