DEPARTMENT OF TECHNICAL DUCATION

ANDHRA PRADESH
Name : H. Srividya
Designation : SL/CCP
Branch : Commercial & Comp.Practice
Year/Semester : V Semester
Institution : GPW, Palamaner, ChittoorDist.
Subject : Business Economics
Sub. Code : CCP-502
Topic : Consumer Surplus
Duration : 50 Min.
Sub-Topic : Indifference curves Analysis
Teaching Aids : Power point
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Objectives
On completion of this period, you would be
able to-
 Explain the Importance of Indifference Curves
 Describe the superiority of Indifference Curve
Analysis over Marshallian Utility Analysis
 Explain the criticism over the Indifference Curves

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Recap

In the previous class, we have discussed-

 The properties of Indifference Curves

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Importance
 The concept of Indifference Curves is very elegant
and handy tool in economic analysis
 Applied in various fields of economics

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Importance

1. In Consumption
 Used to explain many facts related to
consumer’s behaviour
 Prof. Hicks used this technique to explain the
concept “Consumer’s Surplus”

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Importance
2. In Production
 This technique is used to find the Producer’s
Equilibrium

3. In Exchange
 Used to determine the position of equilibrium
 When two persons are entering into a market
 And dealing with each other

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Importance
4. In Price Control and Rationing
 This technique is used to know the different
preferences of the consumers
 For the rationed commodities
 To fix the supply of the commodities
 In time of wars or shortage of essential
commodities

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Importance
5. In Taxation
 Used to judge the welfare effects of a direct
tax and indirect tax on the individual

6. In Savings
 This technique show the preference of an
individual between present and future goods
 His decision to save depends on his
intensity of desire on present goods over
future goods

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Superiority of Indifference Curve Analysis
over Marshallian Utility Analysis

1.It is more realistic

 Marshall’s utility Analysis based on cardinal
approach, states that utility is measurable -
which is unreal
 But Indifference Curves are realistic as a human
mind is capable of comparing two things without
quantitative measurement

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Superiority of Indifference Curve
Analysis over Marshallian Utility
Analysis
2. No assumption of constant Marginal utility
of Money
 Marshall assumed that the marginal utility of
money is constant – which is unrealistic
 Such assumption is abandoned in the Theory of
Indifference Curves

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Superiority of Indifference Curve
Analysis over Marshallian Utility
Analysis
3. Replacement of the law of Diminishing
Marginal Utility
 Principle of diminishing marginal utility with reference
to one commodity has been replaced by
 The principle of diminishing marginal rate of
substitution between two commodities

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Superiority of Indifference Curve Analysis
over Marshallian Utility Analysis
4. Giffen Paradox explained
 The Indifference Curve analysis explains the
demand for inferior goods
 Which could not be solved by Marshall

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Criticism
Economists like Prof. Robertson and Armstrong
criticized the Indifference Curves in many ways.

1. Based on Unpractical assumptions

Consumer should possess complete knowledge of
all his scale of preferences, which is not possible

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Criticism
2. Very difficult to express when
commodities are more
 Consumer can express his preference in case of
combinations between two commodities
 When it is more than two, illustration is very difficult

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Criticism
3. Highly micro-economic in nature
 Deals with one consumer and that too with only
two commodities and studies the equilibrium of
the consumer
 Not possible to study the behaviour of a group

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Summary
In this period, we discussed-
 The importance of Indifference Curves Analysis
 The superiority of Indifference Curves Theory over
Marshallion Utility Analysis
 Criticisms of Economists like Prof. Robertson and
Armstrong over the Indifference Curves Technique

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Quiz
1. Marshall’s Utility is based on_____________
A. Cardinal Approach
B. Ordinal Approach
C. None of the above

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Quiz
2. Indifference Curve Analysis based
on____________
A. Cardinal Approach
B. Ordinal Approach
C. None of the above

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Quiz
3. Indifference Curve Technique is
used in the field ____________
A. Marketing
B. Distribution
C. Production

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Frequently Asked Questions
1. Explain the fields where Indifference Curves
Technique is applied
2. Describe the superiority of Indifference Curve
theory over the traditional Utility theory
3. List the criticisms on the Indifference Curves
Theory

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