Anonymous

Can You Explain The Ordinal Approach To Consumer Equilibrium?

2 Answers

Anonymous Profile
Anonymous answered
Ordinal Approach is the Indifference Curve approach.

The Indifference Curve (IC) is basically a downward sloping convex curve which shows all the different possible bundles (combinations of goods x and y) which give the consumer the same level of satisfaction. Since the level of satisfaction/utility is the same, he's indifferent to either of the bundles.
The higher the IC the higher will be the level of satisfaction gained by the consumer. So in an 'ordinal' concept, higher IC = higher satisfaction = higher scale of preference.

When we draw a Budget line it indicates the maximum income which we can spend to satisfy the want for the commodities.

So Consumer's Equilibrium is obtained at a point where the Budget line is a tangent to an Indifference Curve.
Any IC which is higher than the budget is unattainable and any IC below the Budget Line means that the consumer isn't fully satisfying his resources.
Muhammad Abdullah786 Profile
This theory of consumer behavior is know by a Varity of its names, as it is called neo-classical theory of consumer equilibrium, Hicksian theory of consumer behavior optimal choice theory indifference curve theory and axiomatic approach to consumers equilibrium etc.

The evaluation of this approach goes back 1881 when a British economists Francis at Edge worth intyroduced the concepts of indifference curve for the first time. Then Italian economists Pareto presented theory with certain modifications. Finally we see the role of two economists JR Hicks and RGD Allen who completed this theory in 1930.

This approach is also made for expelling the consumer's equilibrium who is confronted with the multiplicity of objectives and scarcity of money income. However this approach differs from classical theory in the sense that utility cannot be measured quantitatively because it is a mental phenomena and no consumer possess, utilometer. The basis idea behind indifference curve theory is this, that a consumer keeps number pairs of two commodities in his mind which give him equal more or less satisfaction. This means that according neo-classists utility can be ranked qualitatively.
This is the reason that this approaches Ordinals measurement of utility based upon on the concepts of Ordinal numbers- 1, 2, 3, 4……….., 10………, 20 etc.

Answer Question

Anonymous