Relative to this, Sir John Richard Hicks and Sir Roy George Douglas Allen introduced the technique of indifference curves . The cardinal utility approach is thus replaced by ordinal utility theory. Sir John Richard Hicks Sir Roy George Douglas Allen (8 April 1904 – 20 May 1989) (3 June 1906 – 29 September 1983) Proponents of the theory of ordinal utility believed that this is a better way of determining consumer satisfaction because it simply denotes consumer preferences without assigning them Principles of Economics, Taxation and Agrarian Reform 9
Theory of Consumer Behavior numerical values. III.B.1: Definition and Explanation An indifference curve shows all the various combinations of two goods that give an equal amount of satisfaction to a consumer. The indifference curve analysis approach was developed by J.R. Hicks and R.G.D. Allen in the year 1928. Both viewed utility as purely subjective and immeasurable. III.B.2: Assumptions of the Ordinal Utility Theory 1. Rational behavior of the consumer: Individuals are rational in making decisions from their expenditures on consumer goods. 2. Utility is ordinal: Utility cannot be measured cardinally, but consumer can rank the goods according to the utility or satisfaction level. 3. Diminishing marginal rate of substitution: In the indifference curve analysis, the principle of diminishing marginal rate of substitution is assumed. 4. Consistency in choice: The consumer preference, during another period of time does not change. 5. Goods consumed are substitutable: The goods consumed by the consumer are substitutable. An indifference curve is a locus of points, each of which represents a combination in the consumption of commodities that yield equal level of consumer satisfaction. Consumer A likes banana and biscuit and he can consume them both in various combinations as shown below. Any combinations will give him the same total amount of satisfaction. Indiferrence Schedule 10 Principles of Economics, Taxation and Agrarian Reform Combinatio n Biscuits Bananas 1 1 12 2 2 8 3 3 5 4 4 3 5 5 2
Theory of Consumer Behavior III.B.3: Diagram of Indifference Curve and Indifference Map Graphing the different combinations of bananas and biscuits preferred by Consumer A would result to the following indifference curve. As can be observed, the indifference curve does not give numbers of utils or satisfaction levels. It only shows the combinations of bananas and biscuits that Consumer A views as being equally satisfactory. An Indifference Map Drawing more than one indifference curve in one diagram would give us an indifference map. Each successive curve farther from the point of origin or from the original curve indicates a higher level of satisfaction. Based on the above indifference map, say let us keep the consumption of bananas at constant 6 pieces and make adjustments on the biscuits, gives us the following combinations: IC1 = (2, 6) IC2 = (2.75, 6) IC3 = (3.25, 6) It can be observed that the consumption of “biscuits” increases as we move from IC1<IC2<IC3 resulting to higher consumer satisfaction.
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