2.4.ppt-Ordinal Utility Approach in Economics

2.4.ppt-Ordinal Utility Approach in Economics

1. BUSINESS ECONOMICS
107
UNIT- 2
Faculty Name: Dr. Shuchi Singhal
Designation: Associate Professor
School/Dept: Management
Email address of Faculty Member: [email protected]

2. Programme Outcomes
2
PO1: Apply knowledge of various functional areas of business
PO2: Develop communication and professional presentation skills
PO3: Demonstrate critical thinking and Analytical skills for business
decision making
PO4: Illustrate leadership abilities to make effective and productive
teams
PO5: Explore the implications and understanding of the process of
starting a new venture
PO6: Imbibe responsible citizenship towards a sustainable society
and ecological environment
PO7: Appreciate inclusivity towards diverse cultures and imbibe
universal values
PO8: Foster Creative thinking to find innovative solutions for
various business situations

3. Course Objective and Course Outcomes
3
CO1:Understand the fundamental concepts of Business
Economics.
CO2:Analyze the relationship between consumer behaviour
and demand.
CO3:Explore the theory of production through the use of
ISO-QUANTS.
CO4:Understand the concept and relevance of short-term
and long-term cost.
CO5:Examine pricing decisions under various market
conditions.
CO6:Analyse economic challenges posed to businesses

4. Syllabus

5. Consumer Behavior and Demand
Analysis
2.1 CARDINAL UTILITY APPROACH: DIMINISHING MARGINAL UTILITY
2.2 CARDINAL UTILITY APPROACH: LAW OF EQUI- MARGINAL UTILITY
2.3 ORDINAL UTILITY APPROACH: INDIFFERENCE CURVES-Part 1
2.4 ORDINAL UTILITY APPROACH: INDIFFERENCE CURVES-Part 2
2.5 MARGINAL RATE OF SUBSTITUTION
2.6 BUDGET LINE AND CONSUMER EQUILIBRIUM
2.7 THEORY OF DEMAND
2.8 LAW OF DEMAND
2.9 MOVEMENT ALONG VS. SHIFT IN DEMAND CURVE
2.10 CONCEPT OF MEASUREMENT OF ELASTICITY OF DEMAND
2.11 FACTORS AFFECTING ELASTICITY OF DEMAND
2.12 INCOME ELASTICITY OF DEMAND, CROSS ELASTICITY OF DEMAND,
ADVERTISING ELASTICITY OF DEMAND
2.13 DEMAND FORECASTING: NEED, OBJECTIVE AND METHODS IN BRIEF
By: Shuchi Goel 5

6. 2.4
•Marginal Rate of
Substitution
•Why does MRS
diminish?
6

7. 2.4 MARGINAL
RATE OF
SUBSTITUTION
By: Shuchi Goel 7

8. Suggested Readings
Author: Robert S. Pindyck & Daniel L Rubinfeld
Title of the Book: Microeconomics
Chapter’s Name: Consumer Behavior

Author: Paul A. Samuelson & William D. Nordhaus
Title of the Book: Economics
Chapter’s Name: Demand and Consumer Behaviour
Author: Christopher R. Thomas & S. Charles Maurice
Title of the Book: Managerial Economics-Foundations of
Business Analysis and Strategy
Chapter’s Name: Theory of Consumer Behaviour
https://www.princeton.edu/~dixitak/Teaching/InternationalTrade/Precepts/ECO352_Precept_Wks1-2.pdf

By: Shuchi Goel 8

9. 2.4 MARGINAL RATE OF SUBSTITUTION
Marginal Rate of Substitution (MRS)
•An important concept in indifference curve analysis is the ‘Marginal Rate of
Substitution’.
•MRS is the rate at which one commodity can be substituted for another, the
level of satisfaction remaining the same.
By: Shuchi Goel 9

10. Figure 1:
By: Shuchi Goel 10

11. •Thus, slope of indifference curve = - dy/ dx or –∆ y/ ∆x = MRSx,y
By: Shuchi Goel 11

12. •The marginal rate of substitution (the slope of the indifference curve) is
equal to the ratio of the marginal utilities of the commodities involved:
MRS
x,y
= MU
x
MU
y
By: Shuchi Goel 12

13. Why does the MRS diminish?
1.Diminishing subjective marginal utility
2.Decreasing ability to sacrifice a good
By: Shuchi Goel 13

14. Conclusion
•MRS is the rate at which one commodity can be substituted for another, the level
of satisfaction remaining the same.
•It measures the number of units of Y that must be given up per unit of X added so
as to maintain a constant level of utility.
By: Shuchi Goel 14