Why Indifference Curve is better than Marginal Utility ?

 

What is an Indifference Curve?

An indifference curve is a contour line where utility remains constant across all points on the line. In economics, an indifference curve is a line drawn between different consumption bundles, on a graph charting the quantity of good A consumed versus the quantity of good B consumed. At each of the consumption bundles, the individual is said to be indifferent.

What is an Marginal Utility?

When an individual consumes goods and services, the satisfaction gained or lost from consumption is called utility. Consumer preferences are defined by the consumption bundles that consumers face. A collection bundle is a bundle that maximizes the consumer’s total utility, given the consumer’s budget constraints. One unit of utility is known as a util.

Combinations of two Goods instead of one Good:

The utility approaches a single-commodity analysis in which the utility of one comm6dity is regarded independent of the other. Marshall avoided the discussion of substitutes and complementary goods by grouping them together as one commodity. This assumption is far from reality because a consumer buys not one but combinations of goods at a time. The indifference curve technique is a two-commodity model which discusses consumer behaviour in the case of substitutes, complementaries and unrelated goods. It is, thus, superior to the utility analysis.

the Law of Diminishing Marginal Utility without the Unrealistic assumptions of the Utility Analysis:

The utility analysis postulates the law of diminishing marginal utility which is applicable to all types of goods, including money. Since this law is based on the cardinal measurement, it possesses all the defects inherent in the cardinal analysis. In the preference theory, this law has been replaced by the principle of diminishing marginal rate of substitution. The latter, according to Prof. Hicks, ‘is not mere translation but is a positive change’. It is scientific and is, at the same time, free from the psychological quantitative measurement of the utility analysis. The application of this principle in the fields of consumption, production and distribution has made economics more realistic.

Assumption of Constant Marginal Utility of Money:

The utility analysis assumes constant marginal utility of money. Marshall justified it on the plea that an individual consumer spends only a small part of his whole expenditure on any one thing at a time. This assumption makes the utility theory unrealistic in more than one way. It is applicable to a single-commodity model. It fails to use money as the measuring rod of an individual’s satisfaction derived from the consumption of various goods. On the other hand, the indifference curve technique analyses the income effect when the income of the consumer changes.

Proportionality Rule in a Better way:

The indifference curve technique explains consumer’s equilibrium in a similar but better way than the Marshallian proportionality rule. The consumer is in equilibrium at a point where his budget line is tangent to the indifference curve. At this point, the slope of the indifference curve equals the budget line, so that But without its unwarranted assumptions.

rehabilitates the Concept of Consumer’s Surplus:

Hicks has explained the concept of consumer’s surplus by dispensing with the unrealistic assumption of the marginal utility of money. He regards consumer’s surplus “as a means of expressing, in terms of money income, the gain which accrues to the consumer as a result of a fall in price.” Thus the doctrine of consumer’s surplus is no longer a ‘mathematical puzzle’ and has been freed from the introspective cardinalism of the utility theory.

Law of Demand more realistically:

The indifference curve technique explains the Marshallian Law of Demand in a more realistic manner in more than one way. It is untainted by the psychological assumptions of the utility analysis. It explains the effect of the fall in the price of an inferior good on consumer’s demand. Giffen goods which remained a paradox for Marshall throughout have been ably explained with the help of this technique. Whereas in the Marshallian Law of Demand, the demand for a commodity varies inversely with its price and the demand curve slopes negatively downward to the right, the indifference analysis explains two more situations:

(i) With the fall in the price of a commodity, its demand remains unchanged. It happens in the case of those inferior goods whose income effect exactly equals substitution effect.

(ii) When the price of the commodity falls, its demand also falls. This is the case of Giffen goods whose income effect outweighs the substitution effect and the demand curve slopes upward having a positive slope.