{"id":3588,"date":"2020-02-24T05:33:45","date_gmt":"2020-02-24T05:33:45","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3588"},"modified":"2020-02-24T05:33:45","modified_gmt":"2020-02-24T05:33:45","slug":"indifference-curve-analysis","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/indifference-curve-analysis\/","title":{"rendered":"INDIFFERENCE CURVE ANALYSIS"},"content":{"rendered":"\n
Table of Contents<\/p>\nToggle<\/span><\/path><\/svg><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\nINDIFFERENCE CURVE ANALYSIS<\/a>INDIFFERENCE CURVE <\/a><\/li>INDIFFERENCE\nSCHEDULE<\/a><\/li>INDIFFERENCE MAP<\/a><\/li>MARGINAL\nRATE OF SUBSTITUTION<\/a><\/li>BUDGET LINE<\/a><\/li>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/a><\/li><\/ul><\/li>PROPERTIES\nOF INDIFFERENCE CURVE<\/a>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/a><\/li>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<\/span>INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h1>\n\n\n\nThe concept of Indifference Curve Analysis was first propounded by British economist Francis Ysidro Edgeworth<\/strong> and was put into use by Italian economist Vilfredo Pareto<\/strong> during the early 20th<\/sup> century. However, it was brought into extensive use by economists J.R. Hicks and R.G.D Allen<\/strong>.<\/p>\n\n\n\nHicks and Allen\ncriticized Marshallian cardinal approach of utility and developed indifference\ncurve theory of consumer\u2019s demand. Thus, this theory is also known as ordinal\napproach.<\/p>\n\n\n\n<\/span>INDIFFERENCE CURVE<\/strong> <\/span><\/h3>\n\n\n\nAn indifference curve is a locus of all combinations of two\ngoods which yield the same level of satisfaction (utility) to the consumers.<\/p>\n\n\n\nSince\nany combination of the two goods on an indifference curve gives equal level of\nsatisfaction, the consumer is indifferent to any combination he consumes. Thus,\nan indifference curve is also known as \u2018equal satisfaction curve\u2019 or\n\u2018iso-utility curve\u2019.<\/p>\n\n\n\nACCORDING TO WATSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference schedule is a list of combinations of two commodities the list\nbeing so arranged that a consumer is indifferent to the combinations,\npreferring none of any other.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO KOUTSOYIANNIS<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is locus of points particular of combination of good which\nyields the same utility to the consumer, so that he is indifferent as to\nparticular combination he consumed.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The concept of Indifference Curve Analysis was first propounded by British economist Francis Ysidro Edgeworth<\/strong> and was put into use by Italian economist Vilfredo Pareto<\/strong> during the early 20th<\/sup> century. However, it was brought into extensive use by economists J.R. Hicks and R.G.D Allen<\/strong>.<\/p>\n\n\n\nHicks and Allen\ncriticized Marshallian cardinal approach of utility and developed indifference\ncurve theory of consumer\u2019s demand. Thus, this theory is also known as ordinal\napproach.<\/p>\n\n\n\n<\/span>INDIFFERENCE CURVE<\/strong> <\/span><\/h3>\n\n\n\nAn indifference curve is a locus of all combinations of two\ngoods which yield the same level of satisfaction (utility) to the consumers.<\/p>\n\n\n\nSince\nany combination of the two goods on an indifference curve gives equal level of\nsatisfaction, the consumer is indifferent to any combination he consumes. Thus,\nan indifference curve is also known as \u2018equal satisfaction curve\u2019 or\n\u2018iso-utility curve\u2019.<\/p>\n\n\n\nACCORDING TO WATSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference schedule is a list of combinations of two commodities the list\nbeing so arranged that a consumer is indifferent to the combinations,\npreferring none of any other.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO KOUTSOYIANNIS<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is locus of points particular of combination of good which\nyields the same utility to the consumer, so that he is indifferent as to\nparticular combination he consumed.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Hicks and Allen\ncriticized Marshallian cardinal approach of utility and developed indifference\ncurve theory of consumer\u2019s demand. Thus, this theory is also known as ordinal\napproach.<\/p>\n\n\n\n
An indifference curve is a locus of all combinations of two\ngoods which yield the same level of satisfaction (utility) to the consumers.<\/p>\n\n\n\n
Since\nany combination of the two goods on an indifference curve gives equal level of\nsatisfaction, the consumer is indifferent to any combination he consumes. Thus,\nan indifference curve is also known as \u2018equal satisfaction curve\u2019 or\n\u2018iso-utility curve\u2019.<\/p>\n\n\n\n
ACCORDING TO WATSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference schedule is a list of combinations of two commodities the list\nbeing so arranged that a consumer is indifferent to the combinations,\npreferring none of any other.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO KOUTSOYIANNIS<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is locus of points particular of combination of good which\nyields the same utility to the consumer, so that he is indifferent as to\nparticular combination he consumed.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
\u201cAn\nindifference schedule is a list of combinations of two commodities the list\nbeing so arranged that a consumer is indifferent to the combinations,\npreferring none of any other.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO KOUTSOYIANNIS<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is locus of points particular of combination of good which\nyields the same utility to the consumer, so that he is indifferent as to\nparticular combination he consumed.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
ACCORDING TO KOUTSOYIANNIS<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is locus of points particular of combination of good which\nyields the same utility to the consumer, so that he is indifferent as to\nparticular combination he consumed.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
\u201cAn\nindifference curve is locus of points particular of combination of good which\nyields the same utility to the consumer, so that he is indifferent as to\nparticular combination he consumed.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
ACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
\u201cA\nsingle indifference curve shows the different combinations of X and Y that\nyields equal satisfaction to the consumer.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
ACCORDING TO FERGUSON<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
\u201cAn\nindifference curve is a combination of goods, each of which yields same level\nof utility to which the consumer is indifferent.\u201d<\/strong><\/p>\n\n\n\nACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
ACCORDING TO PROF. J.M. JOSHI<\/strong><\/p>\n\n\n\n\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\nACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
\u201cAn\nindifference curve is a locus of points which are geometrical representations\nof combination of commodities (X and Y) such that the consumer is indifferent\namong any of these combinations.\u201d<\/p>\n\n\n\n
ACCORDING TO PROF. J.K. SMITH <\/strong><\/p>\n\n\n\n\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\nACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
\u201cIt is locus of the\npoints representing pairs of quantities between which the individual is\nindifferent, so it is termed as indifference curve.\u201d<\/p>\n\n\n\n
ACCORDING TO PROF. HENDERSON AND PROF. QUANDT<\/strong><\/p>\n\n\n\n\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\nThe Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
\u201cThe locus of all\ncommodity combinations from which a consumer derives the same level of\nsatisfaction forms an indifference curve.\u201d<\/p>\n\n\n\n
The Indifference\nCurve<\/strong> shows the different combinations of two goods that\ngive equal satisfaction and utility to the consumers. In other words, the\nindifference curve is the graphical representation of different combinations of\ngoods (generally two), for which the consumers are indifferent, in terms of the\noverall satisfaction and the utility.<\/p>\n\n\n\n<\/span>INDIFFERENCE\nSCHEDULE<\/strong><\/span><\/h3>\n\n\n\nAn indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\nThe\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
An indifference schedule is a list of combination of two\ncommodities, the list being so arranged that a consumer is indifferent to the\ncombinations, preferring none of them to any of other. Thus, an indifference schedule\nmay be defined as a schedule of various combinations of two goods that will be\nequally acceptable to the consumer.<\/p>\n\n\n\n
The\ntable given below is an example of indifference schedule and the graph that\nfollows is the illustration of that schedule.<\/p>\n\n\n\n\n Combination<\/strong>\n <\/td>\n Mangoes<\/strong>\n <\/td>\n Oranges<\/strong>\n <\/td><\/tr>\n A\n <\/td>\n 1\n <\/td>\n 14\n <\/td><\/tr>\n B\n <\/td>\n 2\n <\/td>\n 9\n <\/td><\/tr>\n C\n <\/td>\n 3\n <\/td>\n 6\n <\/td><\/tr>\n D\n <\/td>\n 4\n <\/td>\n 4\n <\/td><\/tr>\n E\n <\/td>\n 5\n <\/td>\n 2.5\n <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nGraphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Graphical representation of indifference curve<\/strong><\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>INDIFFERENCE MAP<\/strong><\/strong><\/span><\/h3>\n\n\n\nThe Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The Indifference Map<\/strong> is the graphical\nrepresentation of two or more indifference curves showing the several\ncombinations of different quantities of commodities, which consumer consumes,\ngiven his income and the market price of goods and services.<\/p>\n\n\n\nThe consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The consumer preferences give rise to several combinations of commodities, each yielding the same level of satisfaction. Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. The concept of the indifference map can be further understood through a figure given below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The space between axis X and Y is called as the Indifference\nPlane<\/strong> or Commodity Space<\/strong>. This plane is comprised of finite\npoints, each point representing the different combinations of goods X and Y. It\nis possible to identify two or more points on the indifference plane, which\nshows different combinations of good X and Y, yielding the same level of\nutility.<\/p>\n\n\n\nThus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Thus, it is always possible to draw a number of\nindifference curves without intersecting or being tangent to each other. These\nindifference curves Viz. IC1<\/sub>, IC2<\/sub>, IC3<\/sub>, IC4<\/sub>,\ndrawn graphically represents the indifference map. Thus, an indifference map\nmay contain several IC curves positioned on the basis of the consumer\u2019s\npreferences.<\/p>\n\n\n\n<\/span>MARGINAL\nRATE OF SUBSTITUTION<\/strong><\/span><\/h3>\n\n\n\nThe marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The marginal\nrate of substitution (MRS) can be defined as how many units of good x have to\nbe given up in order to gain an extra unit of good y, while keeping the same\nlevel of utility<\/em>.\nTherefore, it involves the trade-offs of goods, in order to change the\nallocation of bundles of goods while maintaining the same level of\nsatisfaction. It can be determined using the following formula:<\/p>\n\n\n\n(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
(MRSxy) = \u2206Y\/ \u2206X<\/strong><\/p>\n\n\n\nThe Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n<\/span>BUDGET LINE<\/strong><\/span><\/h3>\n\n\n\nA budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\nThe two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The Marginal Rate of Substitution is used to analyze the indifference curve. This is because the slope of an indifference curve is the MRS.<\/p>\n\n\n\n
A budget line is a straight line\nthat slopes downwards and consists of all the possible combinations of the two\ngoods which a consumer can buy at a given market price by allocating all\nhis\/her income. It is an entirely different concept from that of an indifference curve, though they are both are\nessential for consumer equilibrium.<\/p>\n\n\n\n
The two essential\ncomponents<\/strong> of a budget line are:<\/p>\n\n\n\nThe\npurchasing power of a consumer, i.e. his\/her income;<\/li>The\nmarket price of both commodities.<\/li><\/ul>\n\n\n\nThe budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The budget line is shown as below:<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\n<\/span>ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nIndifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Indifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol<\/strong> has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.<\/p>\n\n\n\nThe various assumptions of the analysis are explained below.<\/p>\n\n\n\nCONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The various assumptions of the analysis are explained below.<\/p>\n\n\n\n
CONSISTENCIES<\/strong><\/p>\n\n\n\nIt is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\nPERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
It is assumed that the consumer is consistent in his choice, i.e.\nif in one period he chooses commodity A over B; then he will not choose B over\nA in another period if both the commodities are available in the same amount.\nThis condition simply requires that the consumers tastes possess a conceptually\nsimple type of consistency.<\/p>\n\n\n\n
PERFECT\nKNOWLEDGE<\/strong><\/p>\n\n\n\nA consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\nTWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
A consumer is assumed to have complete knowledge regarding the\ntypes of goods available, their prices and their capacity to satisfy a want. He\nis also assumed to know his income during his consumption- planning period.<\/p>\n\n\n\n
TWO GOODS<\/strong><\/p>\n\n\n\nIt is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\nTASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
It is assumed that consumer has a fixed amount of money whole of\nwhich is to be spent on the two goods, given constant prices of both the goods.\nThis is a very restrictive assumption, because, in reality, the consumer deals\nwith a large number of commodities. This restrictive assumption is made to\nfacilitate graphic representation of indifference curves.<\/p>\n\n\n\n
TASTES AND\nPREFERENCES<\/strong><\/p>\n\n\n\nThe tastes and preferences of consumer do not change.<\/p>\n\n\n\nTRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The tastes and preferences of consumer do not change.<\/p>\n\n\n\n
TRANSITIVITY<\/strong><\/p>\n\n\n\nIt is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\nThat is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\nNON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
It is assumed that consumer\u2019s choices are characterised by\ntransitivity and consistency. Given three commodities bundles \u2018A\u2019, \u2018B\u2019, and\n\u2018C\u2019, if a consumer prefers \u2018B\u2019 to \u2018A\u2019 and \u2018C\u2019 to \u2018B\u2019, he will definitely\nprefers \u2018C\u2019 to \u2018A\u2019.<\/p>\n\n\n\n
That is, if B > A, C > B, then C > A. Similarly, if the\nconsumer is indifferent between \u2018A\u2019 and \u2018B\u2019, \u2018B\u2019 and \u2018C\\ then he will be\nindifferent between \u2018A\u2019 and \u2018C\u2019. The consistency assumption implies well\ndefined preferences, that is, if A< B, then B > A.<\/p>\n\n\n\n
NON SATIETY<\/strong><\/p>\n\n\n\nSatiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\nDIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Satiety means\nsaturation. And, indifference curve theory assumes that the consumer has not\nreached the point of satiety. It implies that the consumer still has the\nwillingness to consume more of both the goods. The consumer always tends to\nmove to a higher indifference curve seeking for higher satisfaction.<\/p>\n\n\n\n
DIMINISHING MARGINAL RATE OF SUBSTITUTION<\/strong><\/p>\n\n\n\nMarginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\nAnd, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\nAs indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\nRATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Marginal rate of\nsubstitution may be defined as the amount of a commodity that a consumer is\nwilling to trade off for another commodity, as long as the second commodity\nprovides same level of utility as the first one.<\/p>\n\n\n\n
And, diminishing\nmarginal rate of substitution states that the rate by which a person\nsubstitutes X for Y diminishes more and more with each successive substitution\nof X for Y.<\/p>\n\n\n\n
As indifference\ncurve theory is based on the concept of diminishing marginal rate of substitution,\nan indifference curve is convex to the origin.<\/p>\n\n\n\n
RATIONALITY<\/strong><\/p>\n\n\n\nConsumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\nDIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Consumer is assumed to be rational. He aims to maximise the total\nsatisfaction, given his income and market prices. He is also assumed to have\nfull knowledge of market conditions. Further, he is consistent in his choice,\ni.e., if in one situation he chooses combination \u2018A\u2019 rather than combination\n\u2018B\u2019 he will not choose \u2018B\u2019 in preference to \u2018A\u2019 in another situation.<\/p>\n\n\n\n
DIVISIBILITY<\/strong><\/p>\n\n\n\nThe commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\nPOSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The commodities are assumed to be divisible. This means that\nquantities of commodities can be increased (or decreased) in minute amounts and\nthe corresponding changes in total satisfaction can also be very small. This\nassumption makes indifference curve continuous without gaps or breaks.<\/p>\n\n\n\n
POSITIVE MARGINAL UTILITIES<\/strong><\/p>\n\n\n\nThe goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\nORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The goods (or commodities) are\nconsidered good and have positive marginal utilities. This implies that given\nany combination of two commodities, increase in quantity of one commodity\nincreases the total satisfaction and vice-versa. Therefore, in order to keep\nthe total utility at the same level, the quantity of one commodity should be\nincreased for every reduction in the quantity of other commodity.<\/p>\n\n\n\n
ORDINAL UTILITY<\/strong><\/p>\n\n\n\nUtility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\nCOMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Utility can be measured only in ordinal terms and not cardinal\nones. In other words, consumer cannot measure precisely utility or satisfaction\nin absolute units. He can conveniently arrange various combinations of two or\nmore goods in ascending or descending order of preference. Between any two\ncombinations, he is only able to tell that utility from one combination is more\nthan, equal to, or less than the utility from the other combination. He is not\nin a position to tell as to the amount of difference in the utility from any\ntwo combinations.<\/p>\n\n\n\n
COMPLETENESS<\/strong><\/p>\n\n\n\nTo enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n<\/span>PROPERTIES\nOF INDIFFERENCE CURVE<\/strong><\/span><\/h2>\n\n\n\nDOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
To enable the consumer to make an optimal choice in the commodity\nspace (entire area lying between the X-axis and Y-axis, it is assumed that\nbetween any two bundles, either the consumer is indifferent or one is preferred\nto other. Thus, every commodity bundle will lie on some indifference curve.<\/p>\n\n\n\n
DOWNWARD SLOPING<\/strong><\/p>\n\n\n\nAn indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
An indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility.Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
CONVEX TO THE ORIGIN<\/strong><\/p>\n\n\n\nThe indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\nFor example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The indifference curves are convex to\nthe origin because of the diminishing marginal rate of substitution. The MRS\ndiminishes because of the decline in the marginal utility, which means with more\nand more consumption of one commodity, the customer\u2019s utility starts declining\nand he is not willing to consume it more at the cost of the other commodity.<\/p>\n\n\n\n
For example,<\/strong> let\u2019s say there are two commodities, coffee and cigarattes, with more and more consumption of coffee, the utility continues to decline, and the customer will no more give up the cigarettes to buy the coffee. Here, MRS shows the slope of the indifference curve.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nHIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
HIGHER THE INDIFFERENCE CURVE, THE\nHIGHER IS THE LEVEL OF SATISFACTION<\/strong><\/p>\n\n\n\nThe consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nCANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
CANNOT INTERSECT OR BE TANGENT TO\nEACH OTHER<\/strong><\/p>\n\n\n\nThe indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\nThus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The indifference curves cannot\nintersect with each other, because if it does so, then the combinations of two\ncommodities lying on two different curves will yield the same level of\nsatisfaction which is not correct.<\/p>\n\n\n\n
Thus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
INDIFFERENCE CURVE DO NOT TOUCH\nHORIZONTAL OR VERTICAL AXIS<\/strong><\/p>\n\n\n\nOne\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\nIn the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
One\nof the basic assumptions of indifference curves is that the consumer purchases\ncombinations of different commodities. He is not supposed to purchase only one\ncommodity. In that case indifference curve will touch one axis. This violates\nthe basic assumption of indifference curves.<\/p>\n\n\n\n
In the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nINDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
INDIFFERENCE CURVES ARE\nNOT NECESSARILY PARALLEL TO EACH OTHER<\/strong><\/p>\n\n\n\nThough they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Though they are falling, negatively inclined to the right, yet the rate of fall will not be the same for all indifference curves. In other words, the dimin\u00adishing marginal rate of substitution between the two goods is essentially not the same in the case of all indifference schedules. The two curves I1<\/sub>and I2<\/sub> shown in figure are not parallel to each other.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nPERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
PERFECT COMPLEMENTARY GOODS HAVE L-SHAPED INDIFFERENCE CURVES<\/strong><\/p>\n\n\n\nIn case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
In case of those complementary goods which are jointly demanded like bread and butter, shoes and socks, etc., the indifference curves will be L-shaped as given in Diagram.<\/p>\n\n\n\nINDIFFERENCE CURVE ANALYSIS<\/strong><\/figcaption><\/figure>\n\n\n\nThe diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n<\/span>UTILITY OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/strong><\/span><\/h3>\n\n\n\nPROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The diagram depicts that two perfect complementary goods will have L-shaped indifference curves and they will be parallel to OX-axis and OY-axis joining each other at 90\u00b0.<\/p>\n\n\n\n
PROBLEM OF\nEXCHANGE <\/strong><\/p>\n\n\n\nWith the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\nEFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
With the\nindifference curve method the problem of exchange amidst two individuals can be\nconversed. We take two consumers A and B in fixed amount correspondingly. The\nproblem is how they can exchange the commodities obsessed by each other. This\ncan be unravelled by building an EdgeWorth Bowley box figure on the basis of\ntheir choice maps.<\/p>\n\n\n\n
EFFECTS OF SUBSIDY ON CONSUMERS<\/strong><\/p>\n\n\n\nThe\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\nTHE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The\nindifference Curve method can be used to gauge the effects of government\nsubsidy on low earnings groups. We take a condition when the subsidy is not\npaid in money but the consumers are supplied cereals at dispensation rates the\nprice difference being paid by the government.<\/p>\n\n\n\n
THE PROBLEM OF RATIONING<\/strong><\/p>\n\n\n\nThe\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\nINDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The\nindifference curve method is used to make clear the problem arising from\ndiverse systems of rationing. Usually rationing comprises of setting specific\nand equal quantities of commodities to each individual. The other, rather\nliberal scheme is to allow an individual more or less quantities of the\nrationed commodities according to his liking. It can be demonstrated with the\nhelp of indifference curve study that the last scheme is definitely better and\nbeneficial than the former.<\/p>\n\n\n\n
INDEX NUMBERS: MEASURING COST OF LIVING<\/strong><\/p>\n\n\n\nThe\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\nEARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The\nindifference curve study is used in measuring the cost of living or standard of\nliving in terms of index numbers. We come to identify with the help of index\nnumbers whether the consumer is better off or worse off by matching two time\nperiods when the earnings of the consumer and prices of two commodities vary.<\/p>\n\n\n\n
EARNINGS LEISURE TRADE-OFF AND SUPPLY OF LABOUR<\/strong><\/p>\n\n\n\nA worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\nEFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
A worker’s\noffer to supply his labour depends on his choices amidst earnings and leisure\nand the wage rate. Earnings and leisure are inversely allied, whereas there is\na direct affiliation amidst earnings and hours per day. Leisure is always\nexchange for earnings. The supply curve of an individual worker can also be\nderived with the indifference curve method. His offer to supply labour depends\non his choice amidst earnings and wage rate.<\/p>\n\n\n\n
EFFECT OF EARNINGS TAX VS. EXCISE DUTY<\/strong><\/p>\n\n\n\nThe\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\nTHE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The\nindifference curve method in considering the benefit allegations of earnings tax\nvs. excise duty is sales tax. The question is whether an earnings tax hurts the\ntax payer more or an excise duty of an equal amount. In actual, the earnings\ntax is equivalent to an excise duty places the tax payer in a favourable\nposition.<\/p>\n\n\n\n
THE SAVING PLAN OF AN INDIVIDUAL<\/strong><\/p>\n\n\n\nThe\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n<\/span>CRITICISM OF INDIFFERENCE CURVE ANALYSIS<\/strong><\/span><\/h3>\n\n\n\nThere are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\nIt has been criticised on various\ngrounds as given below:<\/p>\n\n\n\nBASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The\nindifference curve method can also be used to study the saving plan of an\nindividual. An individual’s choice to save depends upon his present and future\nearnings, his likings and choices for present and future commodities, their expected\nprices on current and future rate of interest and on the stock of his savings.\nAs a matter of decision to save is influenced by the intensity of his desire\nfor present commodities and future commodities.<\/p>\n\n\n\n
There are a variety\nof uses of indifference curve analysis. It is superior to utility analysis\nbased on cardinal approach. However, the analysis has its limitations.<\/p>\n\n\n\n
It has been criticised on various\ngrounds as given below:<\/p>\n\n\n\n
BASED ON UNREALISTIC MODEL OF TWO GOODS<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\nIRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The indifference\ncurve analysis is based on two commodity model. As we see in practice that\nconsumers have unlimited wants and for the satisfaction of their wants they\nconsume more than two goods. The analysis is based on two goods model which is\nunrealistic and we cannot study more than two goods with the help of the\nindifference curves. Geometrical technique can study more than two goods and\nalgebra has to be used which is complicated one.<\/p>\n\n\n\n
IRRATIONALITY OF CONSUMER<\/strong><\/p>\n\n\n\nThe indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\nOLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
The indifference\ncurve analysis also assumes that each individual consumer is a rational human\nbeing and he behaves accordingly. But in real practice we see that consumer is\nnot a rational human being. He is not only affected by economic variable but he\nis also affected by non-economic variables, namely, climatic condition, region,\nsocial custom, caste, language and region while taking the decisions.<\/p>\n\n\n\n
OLD WINE IN A NEW BOTTLE<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\nIt has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Indifference curve\nanalysis is nothing but an old wine in a new bottle. It has retained the same\nassumption of utility analysis as propounded by Marshall. It has given concepts\nbut there is not basic difference between utility analysis and indifference\ncurve analysis. It has taken to ordinal numbers, namely, I, II and III in place\nof cardinal numbers, namely, 1, 2, and 3. There is no basic difference between\nthe two.<\/p>\n\n\n\n
It has taken the diminishing marginal rate of\nsubstitution in place of law of diminishing marginal utility (MUx<\/sub>\/MUy<\/sub> = MRSxy<\/sub>). It has presented indifference curve analysis in\nthe new form which is just like the utility analysis.<\/p>\n\n\n\nBASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
BASED ON UNREALISTIC ASSUMPTIONS<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\nSometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\nBASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Indifference curve\nanalysis is based on unrealistic assumptions. It assumes that the consumer is\nwell aware of his preferences or he knows the indifference map. In practice we\nsee that a consumer even does not know the various combinations of two\ncommodities giving the same level of satisfaction. He is not aware of his\nindifference map.<\/p>\n\n\n\n
Sometimes the\ncombinations of two goods are also not realistic which are far from the real\npractice. For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of\nshoes and 2 pairs of shirts will give the same level of satisfaction. It is not\nrealistic and practical.<\/p>\n\n\n\n
BASED ON INDIVIDUAL BEHAVIOUR AND EQUILIBRIUM<\/strong><\/p>\n\n\n\nIndifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\nCOMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n
Indifference curve\nanalysis is based on individual behaviour and equilibrium. It cannot be used to\nstudy the group behaviour of consumers and their equilibrium showing the\ndifferent levels of satisfaction with different combinations of two goods.<\/p>\n\n\n\n
COMPLICATED ANALYSIS<\/strong><\/p>\n\n\n\n