COMPARISON BETWEEN INDIFFERENCE CURVE ANALYSIS AND MARGINAL UTILITY ANALYSIS

COMPARISON BETWEEN INDIFFERENCE CURVE
ANALYSIS AND MARGINAL UTILITY ANALYSIS

Marginal utility is the satisfaction a consumer receives from consuming an additional unit of a good. The indifference curve shows different combinations of 2 goods that the consumer is indifferent towards.

There is difference of opinion among economists about the superiority of indifference analysis over cardinal utility analysis. Professor Hicks is of the opinion that the indifference analysis is more objective and ‘scientific. Professor D.H. Rebertson is of the view that the Hicksian indifference curve technique is simply “old wine in new bottle”. We give in brief the main points of similarity between these two types of analysis and then discuss the superiority of HickSian indifference curve analysis over the Marshallian utility approach.

Similarities Between the Two Approaches.

(1)     Rationality assumption. In the two approaches, it is assumed that the consumer behaves rationally for obtaining satisfaction from his experiditure on consumer goods. Marshall uses the term utility, and Hicks satisfaction’.

(2)  Proportionality rule. The equilibrium condition of the consumer in both the analysis is the proportionality rule. In cardinal utility analysis; the equilibrium condition of

MUa MUb MUc – MUn the consumer is: —

Pb       .Pc  ………. Pn

In the Hicksian analysis, this ratio of marginal utility has been substituted by marginal rate of substitution. MRS”

(3)     Diminishing MU and MRS. Another similarity between the two types of analysis is that both assume that as the consumer gets mOre and more of a commodity, there is diminishing satisfaction to the consumer.

(4) Same conclusion. The cardinal .utility analysis and the Hicksian indifference curve analysis both reach at the same conclusion about the consumer’s behaviour. There is nothing new in the indifference approach.

Superiority of Hicksian Indifference Curve Analysis.

The indifference curve analysis is an improved farm of utility analysis. It is considered more scientific and practically acceptable on the following grounds.

(1) It dispenses with cardinal measurement of utility. Professor 13.G.D. Allen and J.R. Hicks claim that the indifference curves technique is scientific and more realistic than the Marshall’s utility analysis. The foundation of utility analysis is based, they say, on the cardinal utility function which assumes that utility is measurable; whereas utility is purely a subjective phenomenon and cannot be exactly measured. It varies from person to person and time to time. Any effort to measure it precisely will be a futile one.

On the other hand, the indifference approach is based on ordinal utility function, i.e., it does not assign any number to a commodity. representing the amount of the utility. It simply assumes that “the consumer weighs in his mind the relative desirability of the different combinations of goods and service.

(2)       It explains the income effect and price effect. Marshall assumes that the marginal utility of money remains constant whereas the fact is that with a rise or fall in income, the marginal utility of money changes. The indifference curve approach, however, takes into consideration the income effect and the substitution effect due to a change in price of the commodity.

(3)       It studies combination of two goods. It is assumed in the MarshaHien utility analysis that a consumer can measure the utility of a commodity in isolation from other commodities, i.e., it confines itself to a single commodity model. The indifference curve approach, on the other-hand; studies combinatibn of two goods commodity and analyses the relationship of substitutable and complementarily.

(4)       Application of the principle of MRS. The law of diminishing marginal utility has now been replaced by the principle of diminishing marginal rate of substitution. This law is more scientific and realistic and is well applicable in the field of consumption, production and distribution.

(5)       Popularity of indifference curve technique for the analysis of welfare economics. The indifference curve technique is more popular among the British economists and is mostly used for the analysis of welfare economics. For instance:‑

(I) The indifference curve approach helps us to explain that the direct tax imposes a lesser burden than an indirect tax upon the consumer.

(ii)        The Hicksian indifference approach is also used for constructing the supply curve of labour in the country. We can explain with the help of indifference curve technique that when the wages of the workers rise, they begin to prefer leisure. For example, if wife and husband both work and the wage-of the husband increases, wife often leaves the service and begins to do the domestic work.

(iii)    The indifference curve technique is also used for, illustrating the concept of consumer’s surplus.

(iv)    In case of rationing in the country, the indifference approach tells us that as the income and preferences of consumers differ, therefore, the goods shotild not be

distributed equally. The income and tastes of the consumers should always he kept in view.

Criticism

The indifference curve approach has been criticized on the following grounds:

(1)     Old wine in new bottle. Professor D.H. Roberson is of the view that the difference between MarshaIlian’utility analysis and the indifference approach is that an old wine has been put in a. new bottle. The only change which Hicks and Allen has made is that they have used the words marginal rate of substitution ,instead, of marginal utility.

(2)     Away from reality. The indifference curve technique is away from reality as the indifference hypothesis are more complicated.

(3)     Midway house. Schumpter describes indifference analysis as a ‘midway house as it is practically no better than the utility analysis.

(4)     The consumer is not rational. The consumer is not rational as he acts under various social, economic and legal disabilities.

(5)     Two goods model unrealistic. Two good model is unrealistic because a consumer buys large number of commodities to satisfy his unlimited wants.

(6)     All commodities are not divisible.

There is no doubt that indifference curve technique is not without defects°, but when we take into consideration the position as a whole, we find that the indifference approach is superior to that of utility approach because it is more realistic and less restrictive.

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