11 Important Similarities between Indifference Curves Analysis and Conventional Utility Analysis

The indifference curves analysis is now being widely used in the study of economic problems, though originally it was evolved as an alternative to the conventional utility analysis of demand theory.

The two approaches draw upon some common things and are to that extent similar to each other. Some points of similarities between the two approaches are given below:

(i) Both the approaches assume the existence of utility and the application of the law of diminishing marginal utility, though this law is not applicable to money in utility analysis.

(ii) Both of the approaches make use of the method of introspection to reach their conclusions. Utility analysis uses the introspectively derived law of diminishing marginal utility and indifference curve analysis uses indifference map to estimate the utilities of quantities of commodities over a wide horizon.

(iii) In both the approaches, the consumer is said to be in equilibrium, when the ratio of marginal utilities (called marginal rate of substitution in indifference curve analysis) is equal to price ratio.

(iv) Both approaches assume rationality of the consumer, i.e., he endeavours to maximise his utility or satisfaction. In indifference curve analysis, maximum utility is attained by reaching the highest possible indifference curve.

Though, there are some similarities, it will be wrong to say that indifference curve analysis is an old wine put in a new bottle, as interpreted by Robertson. Indifference curve analysis is fundamentally different from utility analysis. It is also superior to that of utility analysis on the following grounds:

(v) Indifference curve analysis studies demand in terms of two or more goods and not in terms of one good alone, as utility analysis does.

(vi) It is more realistic in the sense that utility cannot be measured, while utility analysis assumes that utility can be measured in cardinal terms. However, utility is a subjective concept. We can simply have scale of preferences.

(vii) Indifference curve analysis is able to show the effect of changes in income on demand. Further, indifference curve technique bifurcates price effect of a change in price between income and substitution effect, but utility analysis does not do so. Indifference curve technique explains the law of demand with the help of income and substitution effects. It also offers an explanation for Giffen paradox. Utility analysis, however, ignores the income effect of a change in price of a commodity by assuming constant MU of money.

(viii) This analysis extends the applicability of diminishing marginal utility principle of money, which makes it more realistic. Utility analysis, however, assumes constant marginal utility of money.

(ix) Indifference curve analysis also covers and explains the case of inferior and Giffen goods. It is able to account for and explain the fall in demand for a good, when the income of the consumer increases or when its price falls. Utility analysis is, however, restricted to only normal goods.

(x) Marshall assumes that utilities of two different goods are independent of each other. This assumption is not needed in indifference curves analysis. The cases of complementary and substitute goods are covered here.

(xi) Marginal rate of substitution under indifference curve analysis gives the basis for the concept of elasticity of substitution.

Thus, it is clear from the above discussion that utility analysis makes too many assump­tions and proves less. But, indifference curve analysis makes few assumptions and proves more. Moreover, this analysis is more general than one given by Marshall.

Submitted by : Dr. Noopur, Category : Knowledge