Indifference curve analysis

Some of the major criticisms regarding indifference curve analysis: The indifference curve analysis is no doubt regarded superior to the utility analysis, but critics are not lacking in denouncing it. The main points of criticism are discussed below. (1) Old Wine in New Bottles: Professor Robertson does not find anything new in the indifference cure technique and regards it simply ‘the old wine in a new bottle’. It substitutes the concept of preference for utility. It replaces introspective cardinalism by introspective ordinalism. Instead of the cardinal numbers such as 1, 2, 3, etc., ordinal numbers I, II, III, etc. are used to indicate consumer preferences. It substitutes marginal utility by marginal rate of substitution and the law of diminishing marginal utility by the principle of diminishing marginal rate of substitution. Instead of Marshall’s proportionality rule or consumer’s equilibrium, which expresses the ratio of the marginal utility of a good to its price with ...

The indifference curve technique, as developed by Professor Allen and Hicks, is regarded as an improvement over the Marhsallian utility analysis because it is based on fewer and more realistic assumptions. (1) It dispenses with Cardinal Measurement of Utility: The entire utility analysis assumes that utility is a cardinally measurable quantity which can be assigned weights called ‘UTILS".But the utility which a commodity possesses for a consumer is something subjective and psychological and therefore cannot be measured quantitatively. The indifference approach is superior to the utility analysis because it measures utility ordinally. The consumer arranges the various combinations of goods in a scale of preferences marked as first, second, third, etc. He can tell whether he prefers the first to the second, or the second to the first or he is indifferent between them. But he cannot tell by how much he prefers one to the other. The ordinal method and the assumption of transitiv...

Substitution effect relates to the change in the quantity demanded resulting from a change in the price of good-Y due to the substitution of relatively cheaper good for a dearer one,  while keeping the price of the other good and real income and tastes of the consumer constant.                                                             HICK'S SUBSTITUTION EFFECT Prof.  Hicks has explained the substitution effect independent of the income effect through compensating variation in income. The substitution effect is the increase in the quantity bought as the price of the commodity falls, after adjusting income so as to keep the real purchasing power of the consumer the same as before. This adjustment in income is called COMPENSATING VARIATION and is shown graphically by a parallel shift of the new budget line until it becomes t...

Price effect shows the change in demand of the consumer to changes in the price of a commodity, other things remaining the same. It measures the change in amount demanded of a commodity with change in its price when the price of the other commodity with which it is being combined remains the same. Price effect was measured by the change in the equilibrium position of a consumer resulting from a change in the price of one of the commodities. If the price falls, the consumer goes over to a higher IC. If the price rises, the consumer moves to a lower IC. Price-consumption curve (PCC)  is the locus of all equilibrium points. It indicates the price effect of a change in the price of X on the consumer's purchases of the 2 goods X and Y,  given his income,  tastes,  preferences and the price of good-Y. There are 5 types of PCC. 1) The first type is the one where Goods X and Y are SUBSTITUTES. ****draw diagram In the above figure, the PCC slopes downwards. As the...

In the consumer equilibrium analysis we assumed that the income of the consumer remains constant,  given the prices of Goods X and Y.  Given the tastes and preferences of the consumer and the prices of the two goods,  if the income of the consumer changes,  the effect it will have on his purchases is known as the INCOME EFFECT. If the income of the consumer INCREASES his budget line will shift UPWARD to the RIGHT, parallel to the original budget line. On the contrary, a FALL in this income will shift the budget line INWARD to the left. The budget lines are parallel to each other because relative prices remain UNCHANGED. BUT an INCOME-CONSUMPTION CURVE can have any shape provided it does not intersect an IC more than once. We can have 5 types of income-consumption curve. 1) The first type is explained in the figure below where the ICC curve has a positive slope throughout it's range. Here the income effect is also positive and both X and Y are normal goods. *...

A consumer is in equilibrium when given his tastes, and price of the two goods , he spends a given money income on the purchase of two goods in such a way as to get the maximum satisfaction. It shows a situation in which the consume purchases such a combination of the commodities that he gets the maximum satisfaction from his given income and with given prices of the commodities. The point of equilibrium is such that he does not want a change from it. According to KOULSAYIANNIS, " The consumer is in equilibrium when he maximises his utility, given his income and the market prices ." ASSUMPTIONS :- 1) The consumer indifference map for the two goods X and Y is based on his scale of preference for them which does not change at all in this analysis. 2) His money income is given and constant. 3) Prices of the two goods X and Y are also given and constant. 4) The goods X and Y are homogeneous and divisible. 5) There is no change in the tastes and habits of the cons...

An indifference map indicates the preferences of consumer but the actual selection depends upon his income and the prices of goods.  So,  in order to find out consumers equilibrium we need to know about the budget line. MEANING  The  Budget Line , also called as  Budget Constraint  shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level. According to Prof.Salvatore, "The budget line shows all the different combinations of the 2 commodities that a consumer can purchase , given his or her income and the price of two commodities." EXPLANATION We can explain a price or budget line with the help of a table and diagram. Suppose the monetary income of a consumer is Rs. 40 which he wants to spend on 2 goods X and Y. The price of Good-X is Rs. 2/unit and that of Good-Y is Rs. 1/unit. Given his income and prices of 2 goods,  the alternative consumption or expenditure possi...

MEANING The marginal rate of substitution or MRS is the rate of exchange between some units of goods X and Y which are equally preferred.  The MRS of X for Y (MRSxy), is the amount of Y that will be given up for obtaining each additional unit of X. According to Prof.  Bilas, " The MRS of X for Y is defined as the amount of Y the consumer is just willing to give up to get one more unit of X and maintain the same level of satisfaction. " EXPLANATION This can be explained with the help of the table and diagram below. **draw the table In the above table,  we can see that, to have the 2ND combination and yet to be at the same level of satisfaction,the consumer is prepared to forego 5 units of Y for obtaining an extra unit of X.  The MRS of X for Y is 5:1. Similarly to have the 3rd combination he is prepared to forego 4 units of Y for obtaining an extra unit of X and so on. As the consumer proceeds to have additional units of X,  he is willing to give a...

Properties of Indifference Curve : 1.  Indifference curves are always convex to the origin: An indifference curve is convex to the origin because of the law of diminishing marginal utility. For example,let us assume that a consumer is consuming a combination of apples and bananas.when he consumes more and more of apples, his marginal utility from apples keeps on declining and he is willing to give up less and less of bananas for each apple. Therefore, indifference curves are convex to the origin .  2.  Indifference curve slope downwards: It implies that as a consumer consumes more of one good, he must consume less of the other good. It happens because if the consumer decides to have more units of one good (say apples), he will have to reduce the number of units of another good (say bananas), so that total utility remains the same. 3.  Higher Indifference curves represent higher levels of satisfaction: Higher indifference curve represents large bundle of...

The Indifference curve is a device that has been used to replace the cardinal utility concept. It was given by PROF.  J. R.  HICKS. MEANING An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. It measures utility ordinally.  It explains consumer behaviour in terms of his preferences or rankings for different combination of two goods. An indifferent curve is drawn from the indifference schedule of the consumer.  Indifference schedule shows the various combinations of the two commodities such that the consumer is indifferent to those combinations.  DEFINITION According to Watson, " An indifference schedule is a lis of combinations of two commodities,  the list being so arranged that a consumer is indifferent to the combinations,  preferring n...