Theory of Consumption - Indifference Curve Analysis - An Overview

Introduction: The ordinalists did not accept the Utility Analysis. They pointed out many defects in the Utility Analysis. Some of the defects are as follows:

1. The Utility Analysis is based on the assumption that utility can be measured. But according to the ordinalists utility cannot be measured.

2. The Utility Analysis is based on the assumption that utility is independent. The utility of one thing does not depend upon the utility of another thing. But according to the ordinalists, utility is not independent. The utility that we get out of a commodity depends on the consumption of another commodity. For example: Pen and ink.

3. The Utility Analysis is based on the assumption that the marginal utility of money remains constant. But according to the ordinalists, the marginal utility of money does not remain constant. When the consumer has more money, the marginal utility of money, that is the utility derived from the last dollar spent, will be less. When the consumer has less money, the marginal utility of money will be more.

In order to overcome these defects the ordinalists introduced the Indifference Curve Analysis. Some of the economists are Mr. Fisher and Mr. Edgeworth. This concept of indifference curve was further expanded during the 1950s by two other economists, Mr. Hicks and Mr. Allen.

Meaning: An indifference curve is the representation of the same satisfaction obtained from different combination of two commodities.

This can be shown in the following table.