Comparison
Between
Indifference Curve Analysis and Marginal Utility Analysis:
There is
difference of opinion among economists about the superiority of indifference
analysis over cardinal utility analysis.
Professor Hicks is of the opinion that
the indifference analysis is more objective and scientific.
Professor D.H.
Rebertson is of the view that the Hicksian indifference curve technique is
simply “old wine in new bottle”.
We give in brief the main points of similarly
between these two types of analysis and then discuss the superiority of Hicksian
indifference curve analysis over the Marshallian Utility Approach.
Similarities Between the Two
Approaches:
(i)
Rationality assumption: In the two approaches, it is assumed that the
consumer behaves rationality for obtaining satisfaction from his expenditure on
consumer goods. Marshall uses the term utility, and Hicks satisfaction.
(ii)
Proportionality rule: The equilibrium condition of the consumer in both the
analysis is the proportionality rule. In cardinal utility analysis , the
equilibrium condition of the consumer is:
MUa / Pa = MUb
/ Pb = MUc / Pc …………. = MUn / Pn
In the
Hicksian analysis, this ratio of marginal utility has been substituted by
marginal rate of substitution is:
MRSxy = Px / Py
(iii)
Diminishing MU and MRS: Another similarity between the two types of analysis
is that both assume that as the consumer gets more and more of a commodity,
there is diminishing satisfaction to the consumer.
(iv) Same
conclusion: The cardinal utility analysis and the Hicksian indifference
curve analysis both reach at the same conclusion about the consumer behavior.
There is nothing new in the indifference approach.
Superiority of Hicksian
Indifference Curve Analysis:
The
indifference curve analysis is an improved form of utility analysis. It is
consider more scientific and particularly accepted able on the following
grounds:
(i) It dispenses
with cardinal measurement of utility: Professor R.G.D. Allen and J.R Hicks
claims that the indifference curve technique is scientific and more realistic
than the Marshall’s utility analysis. The foundation of utility analysis is
based, they say, on the cardinal utility function which assumes that the utility
is measurable; whereas utility is purely subjective phenomena and cannot be
exactly measured. It varies from person to person and time to time. Any effort
to measure it precisely will be a futile one.
On the the
other hand, the indifference approach is based on ordinal utility function,
i.e., it does not assign any number to a commodity , representing the amount of
the utility. It simply assumes that the consumer weighs in his mind the relative
desirability of the different combinations of goods and services.
(ii) It explains
the income effect and price effect: Marshall assumes that the marginal utility
of money remains constant whereas the fact is that with a rise or fall in
income, the marginal utility of the money changes. The indifference curve
approach, however, takes into consideration the income effect changes in price
of the commodity.
(iii) It studies
combination of two goods: It assumed in the Marshallian utility analysis that a
consumer can measure the utility of a commodity in isolation from other
commodities, i.e., it confines itself to a single commodity model. The
indifference curve approach, on the other hand; studies combinations of two
goods commodity and analysis the relationship of substitutable and
complementarily.
(iv) Application
of the principle of MRS: The law of diminishing marginal utility has now been
replaced by the principle of diminishing marginal rate of substitution. This
law is more scientific and realistic and is well applicable in the field of
consumption, production and distribution.
(v) Popularity of
indifference curve technique for the analysis of welfare economies: The
indifference curve technique is more popular among the British economists and is
mostly used for the analysis of welfare economies. For instance,
the
indifference curve approach helps us to explain that the direct tax imposes a
lesser burden than an indirect tax upon the consumer.
(a) The
indifference curve approach helps us to explain that the direct tax imposes
a lesser burden than an indirect tax upon the consumer.
(b) The Hicksian
indifference approach is also used for constructing the supply curve of labor in
the country. We can explain with the help of indifference technique that when
the wages of the workers rise, they begin to prefer leisure. For example, if wife
and husband both work and the wages of the husband increases, wife often leaves
the service and begins to do the domestic work.
(c) The
indifference curve technique is also used for illustrating the concept of
consumer's surplus.
(d) In case of
rationing in the country, the indifference approach tells us that as the income
and preferences of consumers differ, therefore, the goods should not be
distributed equally. The income and tastes of the consumers should always be
kept in view.
Criticism of Indifference
Curve Approach:
The
indifference curve approach has been criticized on the following grounds:
(i) Old wine in
new bottle: Professor D.H. Roberson is of the view that the difference between
Marshallian utility analysis and the indifference approach is that an old wine
has been put in a new bottle. The only change which Hicks and Allen has made is
that they have used the words marginal rate of substitution instead, of marginal
utility.
(ii)
Away from
reality: The indifference curve technique is away from reality as the
indifference hypothesis are more complicated.
(iii)
Midway house:
Schumpeter describes indifference analysis as a midway house as it
particularly
no better than the utility analysis.
(iii)
The consumer
is not rational: The consumer is not rational as he acts under various social,
economic and legal disabilities.
(iv)
Two
goods model unrealistic: Two goods
model unrealistic because a consumer buys large number of commodities to satisfy
his unlimited wants.
(v)
All
commodities are not divisible: There is no doubt that indifference curve
technique is not without defects, but when we take into consideration the
position as a whole, we find that the indifference approach is superior to that
of utility approach because it is more realistic and less restrictive.
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