# Indifference Curve Analysis

The Marshal Utility Analysis was widely criticized because, it was based on a defective assumption i.e., satisfaction or the utility that a consumer gets from a particular product could be explained in cardinal numbers. But utility, being a psychological feeling or a subjective entity, cann’t be measured in terms of numbers or it is not quantifiable. In order to overcome this drawback and to explain utility analysis in a most acceptable and in an appropriate manner two economists by name R.J.D. Allen and J.R. Hicks developed an alternative approach in 1939. That newly developed approach is known as ‘Indifference curve analysis’.

This Indifference Curve Analysis is also known as ‘Ordinal Analysis’, because in this the consumer expresses his satisfaction in the ‘order of preference’ or he compares the satisfaction, that he gets from different commodities on the basis of quality. For example: If the consumer consumes three products say A, B & C and out of these three, if the quality of commodity B is greater, then the consumer gives first preference for this and 2nd preference for commodity C, if the quality of C is greater than A and finally 3rd preference for commodity A, since it’s quality is low. Hence the consumer prefers B for C and C for A.

Based on the quality and the level of satisfaction, consumer arranges different combination of goods in the order of preference. This kind of conceptual ordering is technically known as “Scale of Preferences”. Generally, the consumer derives more satisfaction from a larger stock of given goods. For example: The consumer has the following scale of preferences - formulated on the basis of level of satisfaction.

Scale of Preferences

 Combination of Apples and Oranges Level of Satisfaction Order of Preferences 5 Apples & 10 Oranges Highest Ist 3 Apples and 7 Oranges Less than I IInd 1 Apple and 2 Oranges Less than II IIIrd

In the schedule, the consumer is very much clear about his preference. But many times the consumer may come across some combination of goods, which yield the same level of satisfaction and the consumer equally prefers them, because any combination will give him the same level of satisfaction. In such a case, the consumer is said to be ‘indifferent’ between such combination of goods.

In the diagram, any combination (X, Y or Z) gives the consumer the same level of satisfaction. Hence the consumer is indifferent between different combinations.

Hence indifference curve is a locus of points representing all those different combinations of two goods, which yield the same level of satisfaction to the consumer. Hence it is also known as ‘Iso-Utility Curve’.

# Assumptions

The indifference curve analysis given by J.R. Hicks and R.J.D. Allen is based on the following assumptions:
• Rational behavior of the consumer: The consumer always behaves rationally, which means that the consumer tries to obtain the maximum satisfaction from his expenditure on consumer goods. Hence he will choose such a combination of goods, which gives him maximum satisfaction.
• Concept of ordinal utility: Ordinal utility implies that the consumer is in a position to rank the alternative combinations available to him by a simple comparison of the satisfaction obtainable from the given combinations and the consumer always prefer large amount of goods to a smaller amount of goods.
• Transitivity and consistency of choice: If there are three combinations of goods say A, B & C and if the consumer prefers A to B and B to C, he must also prefer A to C. This is because, when a consumer reveals that he prefers A to B, it means that he gets greater satisfaction from A as compared to B and his preference of B over C implies that he gets more satisfaction from B as compared to C. Since the consumer always prefers a combination, which gives him maximum satisfaction, he must prefer A to C also and the consumer taste and preference are consistent.
• The prices of goods are given in the market and they remain constant.
• Diminishing rate of substitution: If the limited income of the consumer is completely allocated on the purchase of two commodities, then increase in the consumption of one commodity is possible only by sacrificing or reducing the consumption of another commodity i.e., one commodity has to be substituted for another commodity. The rate at which one commodity is exchanged for another commodity is known as Rate of Substitution. Initially the consumer gives up more units of one commodity for getting the additional unit of another commodity. Later this rate goes on decreasing.
This could be better explained through an example.

Initially the consumer is consuming 1 cup of tea and 12 biscuits. In order to consume one more cup of tea in the beginning he sacrifices 4 biscuits, but later in order to consume additional cup of tea he sacrifices fewer and fewer units of biscuits because Law of Diminishing Marginal Utility operates here also. When the satisfaction derived is less the sacrifice will also be less. This is law of diminishing rate of substitution.

This could be better explained in the form of a diagram.