Economics · A History of Economic Thought by V Lokanathan
Chapter 24 : INDIFFERENCE CURVE ANALYSIS - ISO-PRODUCT CURVES
Table of contents18 sections
- 1.INDIFFERENCE CURVE ANALYSIS - ISO-PRODUCT CURVES
- 2.Indifference Curve Analysis
- 3.Key Terms
- 4.📌 Exam Tidbits
- 5.Consumer's Equilibrium
- 6.Key Terms
- 7.📌 Exam Tidbits
- 8.Income Effect, Substitution Effect and Price Effect
- 9.Key Terms
- 10.📌 Exam Tidbits
- 11.Criticism
- 12.Key Terms
- 13.📌 Exam Tidbits
- 14.A Note on Iso-Product Curves
- 15.Difference between Iso-product Curves and Indifference Curves
- 16.Key Terms
- 17.📌 Exam Tidbits
- 18.Quick-Recall Box
Chapter preview
INDIFFERENCE CURVE ANALYSIS - ISO-PRODUCT CURVES
Indifference Curve Analysis
The indifference curve analysis was developed to analyse consumer demand as an alternative to the Marshallian utility analysis.
- Foundational Thinkers: Developed by the English economist Edgeworth (1845-1926) and the Italian economist Pareto (1848-1923).
- Modern Development: In recent times, it has been further developed by J. R. Hicks.
Utility Analysis vs. Indifference Curve Analysis
| Feature | Marshallian Utility Analysis | Indifference Curve Analysis |
|---|---|---|
| Approach | Cardinal approach | Ordinal approach |
| Measurement | Assumes marginal utility can be measured quantitatively. | Avoids quantitative measurement; represents a level of satisfaction (can identify higher/lower satisfaction, but not by how much). |
| Scope of Goods | Based on the assumption that only one commodity is consumed at a time. | Used to analyse consumer demand when an individual consumes two or more goods at a time. |
The Indifference Curve and Map
- Each consumer has a scale of preferences.
- An indifference curve shows all those combinations of goods which occupy the same position in the consumer's scale of preference, giving him the same level of satisfaction.
- The consumer is "indifferent" between different combinations so long as he remains on the curve.
- An indifference map consists of a set of indifference curves.
Assumptions About the Shape of Indifference Curves There are exactly 3 general assumptions regarding the shape of an indifference curve:
- Downward Sloping: An indifference curve always slopes downwards from left to right.
- Convexity: All indifference curves are convex to the origin.
- Mechanism/Reason: This is because of the diminishing marginal rate of substitution → the marginal significance of a commodity in terms of the other will always diminish progressively as one acquires more of the former good.
- Non-intersection: No two indifference curves can ever cut each other.
Key Terms
📌 Exam Tidbits
- Edgeworth (1845-1926) & Pareto (1848-1923): Original developers of the indifference curve analysis.
- J. R. Hicks: Further developed the indifference curve analysis in recent times.
- Utility vs. Indifference: Utility is cardinal (quantitative) vs. Indifference is ordinal (qualitative/relative).
- 3 assumptions of shape: Downward sloping, convex to origin, never intersect.
- Convexity cause: Driven by the diminishing marginal rate of substitution.
Consumer's Equilibrium
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