Sunday, March 27, 2011

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.

No comments:

Post a Comment

Want to say something? Say it!

Update(s):Post(s) under preparation: -
View Chandra Bhanu's Art at


Related Posts Plugin for WordPress, Blogger...


indifference curve investment demand-pull inflation economy fiscal policy monetary policy cost-push inflation demand demand for money destabilized economy economics stagflation supply of money Opportunity Cost Quantity Theory of Money Theory of Consumption World economy automatic stabilizer capital choice consumption function current accounts deficit deflationary gap demand for investment depression derivation effects of inflation equilibrium fiscal deficit fresh investment growth imbalance inflation interest money perfect competition savings savings function world Accounting Profit Adam Smith Alfred Marshall Diminishing Marginal Utility Economic Profit Equimarginal Utility General Equilibrium Theory IS Curve J. M. Keynes Keynes' Theory of employment LM Curve Lionel Robbins Normal Profit PPC Production Possibility curve Software system development Utility Analysis accelerator account accounting alternative uses autonomous investment balance of payments book keeping capital goods classical theory of the rate of interest commodity consumer consumer goods consumption credit debit definition deflation discretionary double entry economic functions economic wants educated education ends energy ermployment full employment functions of money growth rate habit imitation imperfect competition income income analysis income determination income effect induced investment inflationary gap investment function knowledge labour less than full employment liquidity preference theory long run long run equilibrium means monetary analysis monetary measures monopoly multiplier price price effect price maker production possibility frontier profit maximization propensity revealed preference analysis sacrifice say's Law scarce science shifts of IS LM curves short run short run equilibrium shut down conditions slow down society stagnation student subsidies subsidy substitution effect success sunk capital supply supply of savings technology unproductive wealth world economy 2012