Top 9 Advantages of Indifference Curve Technique

The following points highlight the top nine advantages of indifference curve technique over marshallian utility analysis. Some of the advantages are: 1. It Dispenses with Cardinal Measurement of Utility 2. It Studies Combinations of Two Goods Instead of One Good 3. It Provides a Better Classification of Goods into Substitutes and Complements and Others.

Advantage # 1. It Dispenses with Cardinal Measurement of Utility:

The entire utility analysis assumes that utility is a cardinally measurable quantity which can be assigned weights called ‘untils’. If the utility of an apple is 10 utils, of a banana 20 utils and of a cherry 40 utils, then the utility of a banana is twice that of an apple and of a cherry four times that of an apple and twice that of a banana.

This is not measurability but transitivity. In fact, the utility which a commodity possesses for a consumer is something subjective and psychological and therefore cannot be measured quantitatively. The indifference approach is superior to the utility analysis because it measures utility ordinally.

The consumer arranges the various combinations of goods in a scale of preferences marked as first, second, third, etc. He can tell whether he prefers the first to the second, or the second to the first or he is indifferent between them. But he cannot tell by how much he prefers one to the other. The ordinal method and the assumption of transitivity make this technique more realistic.

Advantage # 2. It Studies Combinations of Two Goods Instead of One Good:

The utility approaches a single-commodity analysis in which the utility of one commodity 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.

Advantage # 3. It Provides a Better Classification of Goods into Substitutes and Complements:

The earlier economists explained substitutes and complements in terms of cross elasticity of demand. Hicks consider this inadequate and explain them after making compensating variation in income. He thus overcomes the ambiguity to be found in the traditional classification of substitutes and complements.

Advantage # 4. It Explains 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.

Advantage # 5. It is Free from the 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.

Advantage # 6. It Explains the Dual Effect of the Price Effect:

One of the main defects in the Marshallian utility analysis is that it fails to analyse the income and substitution effects of a price change. In the indifference curve technique when the price of a good falls, the real income of the consumer increases. This is the income effect. Secondly, with the fall in price, the good becomes cheaper.

The indifference curve technique is definitely superior to the utility analysis because it discusses the income effect when the consumer’s income changes; the price effect when the price of a particular good changes and its dual effect in the form of the income and substitution effects. It also studies the cross effect when with change in the consumer’s income, the price of the other good also changes.

Advantage # 7. It Explains the 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

Advantage # 8. It Rehabilitates the Concept of Consumer’s Surplus:

Hicks have 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.

Advantage # 9. It Explains the 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.

Marshall failed to explain these cases. This makes the indifference curve technique definitely superior to the Marshallian introspective cardinalism.