A seminar report on

INDIFFERENCE CURVE

SUBMITTED TO
P.G Department of Commerce
SSSS College of Commerce for Women
Amritsar

Supervised By Submitted By
Mrs. Ravneet Arora Radhika Kalra
M.Com Sem 1
3004
 INDEX
Sr.no Content Page no
1. Introduction of Indifference Curve 3

2. Assumption of Indifference Curve 4

3. Indifference schedule 5-6

4. Properties of Indifference Curve 7-13

5. Special Shapes of Indifference Curve 14-15

6. Applications of Indifference Curve 16-20

7. Superiority of Indifference Curve 21-23

8. Criticism 24-27

9. Bibliography 28
 INDIFFERENCE CURVE

INTRODUCTION

An Indifference Curve is a locus of such points which shows different combinations of two
commodities which equal satisfaction to the consumer. It means all point located on an
indifference curve represent such combinations of two commodities as yield equal satisfaction
to the consumer. Indifference Curve is the representation of potentially observable demand
pattern for individual consumers over commodity bundles. Theory of indifference curve was
developed by FRANCIS YSIDRO EDGE WORTH in 1881.

According to Koutsoyiannias: An Indifference

Curve is a locus point particular combinations of
goods which yield the same utility to consumer so, that
he is indifferent to the particular combination he
consumes

Indifference curve is a better tool to classify

substitutes and complementary goods. Indifference
curves are heuristic devices used in contemporary
microeconomics to demonstrate consumer preference and the limitations of a budget. When a
consumer consumes various goods and services, then there are some combinations, which give
him exactly the same total satisfaction. The graphical representation of such combinations is
termed as indifference curve. This approach does not use cardinal values like 1, 2, 3, 4, etc.
Rather, it makes use of ordinal numbers like 1st, 2nd, 3rd, 4th, etc. which can be used only for
ranking. It means, if the consumer likes apple more than banana, then he will give 1st rank to
apple and 2nd rank to banana. Such a method of ranking the preferences is known as ordinal
utility approach.
Assumptions of Indifference Curve

The various assumptions of indifference curve are:

1. Diminishing marginal rate of substitution: It means stock of commodity increases with

consumer, he substitutes it for the other commodity at diminishing rate.

2. Non Satiety: It is assumed that the consumer has not reached the point of saturation.
Consumer always prefer more of both commodities, i.e. he always tries to move to a higher
indifference curve to get higher and higher satisfaction

3. Ordinal Utility: Consumer determines his preference on the basis of satisfaction derived from
different good of their combination utility can be expressed ordinal numbers 1, 2, 3.

4. Rational Consumer: The consumer is assumed to behave in a rational manner, i.e. he aims to
maximize his total satisfaction.

5. Consistency in selection: It means any time of consumer prefer A combination of good to B

combination then another time he will not prefer B combination to A combination.

6. Transivity: This analysis assumes transitivity with regard to indifference and preference. It
means if consumer prefer A combination to B combination and B combination to C combination
he will definitely prefer A combination to C combination. Consumer is indifferent towards A and
B he is also indifferent towards B and C then he will also indifferent towards A and C.

7. Independent sale of preference: Indifference curve is that consumer sale of preference is

independent of his income and price of the good in the market. It means if the income of
consumer changes or prices of good fall or rise in the market than these changes will have no
effect on scale of preferences of the consumer. It is further assumed that scale of preference of a
consumer is not influenced by scale of preference of another consumer.
Indifference Schedule

An indifference schedule refers to a table that indicates different combinations of two

commodities which yield equal satisfaction. Since any combination of the two goods on an
indifference curve gives equal level of satisfaction, the consumer is indifferent to any
combination he consumes. Thus, an indifference curve is also known as equal satisfaction
curve or iso-utility curve.

Table 1. Indifference Schedule

Combination Mangoes Oranges

A 1 14
B 2 9
C 3 6
D 4 4
E 5 2.5

The above schedule shows that the consumer gets equal satisfaction from all the four
combinations, namely A, B, C and D of apples and oranges. In combination 'A' the consumer has
1 mangoes + 14 oranges; in combination 'B' he has 2 mangoes + 9 oranges, in combination 'C' he
has 3 mangoes + 6 oranges, and in combination 'D' he has 4 mangoes + 4 oranges. E he has 5
mangoes + 2.5 oranges . In order to have one more mangoes the consumer sacrifices some of the
oranges in such a way that there is no change in the level of his satisfaction out of each
combination.
On a graph, an indifference curve is a link between the combinations of quantities which the
consumer regards to yield equal utility. Simply, an indifference curve is a graphical
representation of indifference schedule.

Fig. 1

A consumer therefore, gives equal importance to each of the combinations. In other words, he
becomes in different towards them. In the words of Meyers An indifference schedule may be
defined as a schedule of various combinations of goods that will be equally satisfactory to the
individual concerned" Supposing a consumer consumes two goods, namely apples and oranges.
The following indifference schedule indicates different combinations of mangoes and oranges
that yield him equal satisfaction.
Properties of Indifference Curve

(1) An Indifference Curve has a negative Slope or that it Slopes Downwards:

A indifference curve slopes downwards from left to right. In other words, its slope is
negative This property is based on the assumption that if a consumer uses more quantity of
on good he will use less quantity of the other, then only he will have equal satisfaction from
their different combination. If an indifference curve does not slope downwards then it can
either be a vertical line or horizontal line or upward sloping curve. But as is clear from Fig.
6 an indifference curve cannot assume either of these shapes. (A) (B)

Fig. 6

Fig. 6 In Fig. 6, quantity of apples is shown on X-axis and quantity of oranges on Y-axis. Let us
suppose, indifference curve is a vertical line MB as shown in Fig. 6(A). Combination 'A' on this
curve represents more units of oranges with the same units of apples as compared with
combination C. Consequently, 'A' combination yields more satisfaction than 'C' - combination.
So an indifferent curve cannot be vertical or parallel to Y-axis, because different combination,
e.g. 'A' and 'C' of this curve yield different satisfaction.
If indifference curve is a horizontal line as shown in Fig. 6(B), then 'H' combination will yield
more satisfaction than 'C' combination, because in 'H' combination there are more units of apples
than in C combination although units of oranges are the same in both combinations.
Consequently, an indifference curve cannot be horizontal line parallel to X-axis, because
different combinations on this line, e.g. 'C' and 'H' yield different satisfaction to the consumer.

If indifference curve is upward sloping like IJ Fig. 6(C), then the consumer will get more
satisfaction from combination 'A' than B and 'C', because in combination A there are more
units of apples as well as oranges than in combination B and 'C'. Consequently, an indifference
curve cannot be upward sloping positive curve as shown by IJ because different combination on
such a curve represents different and not equal satisfaction.

If indifference curve is downward sloping negative curve as shown LM curve in Fig. 6(D), then
consumer will get equal satisfaction from 'A as well as B combinations, because in case of
combination 'A' if quantity of oranges is more than in combination 'B', then quantity of apples is
less than in combination 'B'. Slope of indifference curve will invariably be like LM, i.e.,
downward sloping negative curve.

This property follows from assumption I. This must be so if the level of satisfaction is to remain
the same on an indifference curve. The amount of good X is increased in the combination, while
the amount of good Y remains unchanged, the new combination will be preferable to the original
one and the two combinations will not therefore lie on the same indifference curve provided
more of a commodity gives more satisfaction. Indifference curve being downward sloping means
that when the amount of one good in the combination is increased, the amount of the other good
is reduced.
(2). Convex to the Point of Origin:

This is an important property of indifference curves. They are convex to the origin (bowed
inward). This is equivalent to saying that as the consumer substitutes commodity X for
commodity Y, the marginal rate of substitution diminishes of X for y along an indifference
curve. In this figure (3.6) as the consumer moves from A to B to C to D, the willingness to
substitute good X for good Y diminishes. This means that as the amount of good X is increased
by equal amounts, that of good Y diminishes by smaller amounts. The marginal rate of
substitution of X for Y is the quantity of Y good that the consumer is willing to give up to gain a
marginal unit of good X. The slope of IC is negative. It is convex to the origin.

In other words, the indifference curve is relatively flatter in its right-hand portion and relatively
steeper in its left-hand portion. This property of indifference curves follows from assumption 3,
which is that the marginal rate of substitution of X for Y (MRSxy) diminishes as more and more
of X is substituted for Y.
(3) Two Indifference Curves never cut each other:

Each indifference curve represents different levels of satisfaction so their intersection ruled out.
In Fig 8 two indifference curve IC1 and IC2 have shown intersecting each other at point A, but it
is not possible. Points A and C on indifference curve IC1 represent combination yielding
equal satisfaction, that is satisfaction from A combination = satisfaction from B combination.
It implies that satisfaction from B combination is equal to satisfaction from C combination;
but it is not possible because in B (3 oranges = 2 apples) quantity of oranges is more than in
C combination (2 oranges = 2 apples) although quantity of apples in both combination is equal.

Fig. 8

In other words only one indifference curve will pass through a point in the indifference map 1 his
property can be easily proved by first making the two indifference curves cut each other and then
showing the absurdity or self-contradictory result it leads to.
 (4) Higher Indifference Curves Represent More Satisfaction:

In indifference map, higher indifference curve represents those combinations which yield more
satisfaction than the combinations on the lower indifference curve. This property is shown in Fig.
9. IC2 is higher and IC1 is lower indifference curve. Point B on IC2 represents more units of
apples than point 'A' on IC1 curve, although in both combinations quantity of oranges is the same.
Hence, point 'B' on IC2 will give more satisfaction than point 'A' on IC1. It is evident therefore,
that higher the indifference curve, greater the satisfaction it will represent.

. Fig.9

It is evident therefore, that higher the indifference curve, greater the satisfaction it will represent.
Indifference curve is that a higher indifference curve will represent a higher level of satisfaction
than a lower indifference curve. In other words, the combinations which lie on a higher
indifference curve will be preferred to the combinations which lie on a lower indifference curve.
(5) Indifference Curve touches neither X-axis nor Y-axis:

It is assumed in the indifference curve ana1ysis that a consumer buys combinations of different
quantities of two goods. Hence, an indifference curve touches neither X-axis nor Y-axis. In case
an indifference curve touches either axis it means that the consumer wants one commodity and
his demand for the second is zero. An indifference curve may touches Y- axis if it represents
money instead of a commodity, shown fig 10. In it IC touches Y- axis at point M. It means the
consumer has in possession OM quantity of money and does not want any unit of apples. At
point N consumer likes to have a combination of OQ quantity of apples and OP units of money.
This combination will yield him same satisfaction as by keeping OM units of money.

Fig. 10

One of the basic assumptions of indifference curves is that the consumer purchases combinations
of different commodities. He is not supposed to purchase only one commodity. In that case
indifference curve will touch one axis. This violates the basic assumption of indifference curves.
(6) Indifference Curves need not be Parallel to each other:

As shown in Fig. 11, indifference curves may or may not be parallel to each other. It all depends
on the marginal rate of substitution of two curves shown in the indifference map. If marginal rate
of substitution of different points on two curves diminishes at constant rate then these curves will
be parallel to each other, otherwise they will not be parallel. Firstly, the Indifference Curves are
not based on the cardinal measurability of utility. Secondly, the rate of substitution between the
two commodities need not be the same in all the indifference schedules. It is therefore not
necessary that the Indifference Curves should be parallel to each other.

Fig.11

(7) Indifference Curves become Complex in case of more than Two Commodities:

When a consumer desires to have combinations of more than two commodities, say, three
commodities, then we will have to draw three dimensional indifference curves which are quite
complex. If consumer wants a combination comprising of more than three goods then such a
combination cannot be expressed in the form of a diagram. In that case, we will have to take
recourse to algebra.
Some special Shapes of Indifference Curves

Fig. 12

Straight Line Indifference Curve:

If two goods are perfect substitutes of each other then their indifference curve may be a straight
line with negative slope as shown in Fig. 12 Indifference Curve depends on the rate of fall in the
marginal rate of substitution of X for Y. As stated above, when two goods are perfect substitutes
of each other, the indifference curve is a straight line on which marginal rate of substitution
remains constant. It is so because the marginal rate of substitution of such goods remains
constant. Supposing, Pepsi and Coke drinks are perfect substitutes of each other. If in place of 1
letre of Pepsi, the consumer buys 1 letre of Coke his total satisfaction remains unchanged. As
such, indifference curve of this kind of goods will not be convex to origin rather it will be a
straight line. Hence (MRSxy =1). This principle makes it possible to substitute one good for
another in order to achieve any particular level of satisfaction or utility. Thus when two goods X
and Y are imperfect substitutes; the indifference curve has its usual negatively sloping shape.
 Fig.13

LShaped (Right-angled) Indifference Curve:

Marginal rate of substitution (MRS) of perfectly complementary goods is zero. For example, a
consumer will buy right and left shoes in a fixed ratio. This situation is shown in Fig. 13. It is'
clear IC1 and IC2 are right-angled (90) curves, meaning thereby, that if the consumer buys one
piece each of right and left-shoes, then he will be on point 'A' of IC1. In case he buys 2 pieces of
left shoe only 1 piece of right-shoe, then he will be at point 'C' of the same IC1. It means, one
more piece only of left-shoe will not add to his satisfaction. But if he also buys one more piece of
right-shoe, then his satisfaction will definitely increase and he will move to point 'B' of the
higher indifference curve IC2. Thus, perfectly complementary goods have indifference curves of
the shape of right-angle. Hence (MRSxy = 0).
APPLICATIONS OF INDIFFERENCE CURVE

(1) In the field of Consumption: In the sphere of consumption, one can find out demand curve
and position of consumer's equilibrium with the help of indifference curves. A consumer is in
equilibrium when he consumes that combination of two goods we budget line is tangent to an
indifference curve and the indifference curve is convex tot point of origin.

(2) Consumer's Surplus: Prof. Hicks has used indifference curve analysis in order to measure
consumer's surplus in a more realistic manner. One can find out with the help indifference curve,
without measuring utility in cardinal numbers, how much price consumer is willing to pay for a
commodity rather than go without it, and how much doe he actually pay. It is the difference
between the two prices which is called consumer's surplus.

(3) Complete Explanation of Demand: Indifference curves are used to study price effect
income effect and substitution effect. Indifference curve analysis shows why demand Curve of
Giffens goods slopes upward from left to right. Exception to law of demand is therefore
explained through indifference curve analysis. It is a complete explanation of the theory of
demand.

(4) In the field of Production: Position of producer's equilibrium can be known with the help of
indifference curve analysis. In the field of production, indifference curves are known as Iso-
Product curves. An iso-product curve represents different combinations of two factors of
production, say, land and capital, which yield the same amount of output. A producer is in
equilibrium position at that point where an Iso-cost curve is tangent to iso-product curve.

(5) Application in Exchange: Prof. Edge worth has used indifference curve analysis to know
the rate of exchange of two goods between two individuals. If two consumers ha re two goods
and they want to exchange them mutually, they will get maximum satisfaction when the same are
exchanged up to a point where the marginal rate of substitution of these goods is equal to both
the consumers. In other words, MRSxy for person = MRSxy for person B.

By doing so both the consumers will get maximum satisfaction. There are two persons one
having one commodity another having another commodity. Now question arises how exchange
will taken place. According to Prof. Edge worth exchange between two individual take place on
this contract curve.

Fig.14

Let us assume that there are two consumers Rahul and Rohan having two goods, apple and
bananas that they want to exchange mutually Scale of preferences of both the consumers are
shown by the indifference curves in the diagram. Fig. 14 Indifference curves of Rahul are IR1,
IR2, IR3 expressing different combinations if two commodities. Rohans indifference curve's
IS1, IS2, IS3 have been placed inversely on Rahul indifference curves. Total quantity of apples
and bananas with Rahul and Rohan, is OX of bananas and OY of apples. It is assumed that
before exchange, Rahul has OA quantity of apples and OB quantity of bananas . Rohan O'C
quantity of apples and O'B' of bananas. It is obvious that Rahul has more of apples and less of
bananas. He will go on substituting bananas for apples till marginal rate of substitution of
bananas for apple (MRSxy) is equal to the price ratio of the two commodities. It is also obvious
that Rahul will have transaction with Rohan, only when he is hopeful of more satisfaction than
before. It means that Rahul will get bananas in place of apples only when he is likely to reach the
higher indifference curve. Similarly, Rohan has more of bananas and less of apples. He will
substitute apples for bananas till such time as the marginal rate of substitution of apples for
bananas is equal to the price ratio of two commodities. Rohan will enter into this transaction with
Rahul only when he is hopeful of getting more satisfaction than before, that is, when he expects
to reach the higher indifference curve. It is clear from the diagram that both will stand to gain
more than before. In other words, both will be in equilibrium at higher indifference curves if they
enter into mutual exchange of their goods. As has already been stated, this process of exchange
will continue till the marginal rate of substitution of two goods is equal to price ratio . It is
assume that price of both the goods is the same. As such, marginal rate of substitution of apples
and bananas will be equal both for Rahul and Rohan. It is confirmed by fact the indifference
curve of both consumers touch each point E, F and G. If we join the three points by a line such a
line will be called CONTRACT CURVE. This will represents the possible equilibrium points of
both the consumers are getting more satisfaction than the before. But it is not necessary that rate
of exchange between both indivual must be settled at this every point. It is depends on the
bargaining power of both the indivuals . Final rate of exchange will be settled point G if the
bargaining capacity of Rahul is more. It will be settled at point E if the bargaining capacity of
Rohan is more. We can at the best state two limits within which rate of exchange will be
determined . It may be determined anywhere between the two points E and G.

(6) Effect of Change in Price Index: Effect of change in price index on the standard of living of
different persons can also be found out with the help of indifference curve analysis. It as a result
of change in price index, without there being any change in the income of the people, they reach
higher indifference Curve than before, it would mean that change in prices has raised their
standard of living. On the contrary, if they reach lower indifference curve, it would mean that
change in prices has adversely affected their standard of living.

(7) Effect of Government Policy on Economic Welfare: Effect of various government policies
regarding payment of subsidies, etc, on the economic well-being of the people can be measured
with the help of indifference curves. If, as a result of some economic policies of the government,
people move from lower indifference curve to higher indifference curve, it means that the policy
has proved beneficial to the economic well-being. On the contrary, if as a result of some
economic policies, people move from higher to lower indifference curve, it means that the said
policy has proved detrimental to general welfare.
(8) In the field of Rationing: This technique can also be made use of in the field of rationing
Ordinarily two commodities are rationed out to different individuals, irrespective of their
preferences. But if their respective preferences are considered and the amounts of the two
commodities be distributed among consumers in accordance with their scale of preferences, each
of them shall be in a position to search a higher indifference curve and satisfaction.

(9) Application in taxation: There are two types of taxes direct tax and indirect tax. Suppose
tax are impose in such a way that revenue of government is same. Now question are arises
whether Indirect taxes or direct taxes are better from consumer point of view. Fig.15 This issue
is solved with help of indifference curve suppose indirect tax are impose on x commodity price
of x1 commodity rises result of consumer equilibrium shift to the point E2.

Fig.15

Now lets suppose direct tax are imposed on the consumer as a result income of the consumer
reduces and he has at equilibrium E2. Now IC2 is higher than the IC therefore we concluded that
consumer is better of when direct tax is imposed. The technique is also applied to test preference
between a direct and indirect tax. With the help of indifference curves it can be shown that a
direct tax is preferable to an indirect tax as regards its effects on consumption and satisfaction of
the tax payer. In view of the above application of the technique, it may be asserted that it forms
an integral part of the modern welfare economics. However, there are certain writers who also
assert that the indifference curves technique is merely the old wine in a new bottle for example,
Prof. Robertson is of the view that this analysis has substituted new concepts and equations in
place of the old ones.

(10) Price Subsidy vs. Income Subsidy: Suppose government wants to help poor .There are two
ways A part To subsidies the price of some commodity. B part to raise income of the poor.

In these case government expenditure remain same in both cases that is what-
ever the amount of subsidies are provided. Government either raises the income by the same
amount that is government expenditure is remain same. Now question arises which of two is
better. Suppose government provided subsidy price of x1 fall that is consumer moves from IC1 to
IC2 and if government raises the income of the poor consumer shifts IC1 to IC3. Now IC3 is
higher than IC2 therefore consumer is better of when income subsidy is provided. Shown in
Fig.16

Fig.16
Superiority of Indifference Curve

(1) Indifference Curve Analysis is more realistic: Pareto criticized utility analysis measures
utility in cardinal numbers. Utility is a subjective concept. It cannot be me, in cardinal numbers
in the same way as we measure the length of a piece of cloth or weight of a bulky good.
Indifference curve analysis is free from this defect. In this analysis utility, measured in ordinal
numbers. It is a more realistic measure of utility. One can say that., likes a cup of coffee more
than a cup of tea but one cannot say how much more one likes it.

(2) Free from the Defect of Independent Commodity: According to edge sword, the main
defect of utility analysis is that it assumes that a consumer buy a single commodity at a time and
its utility is not effected by the utility id other commodities. This assumption means that
complementary goods and substitutes cannot be studied under utility analysis. But in real life
when a consumer consumed a commodity then its utility is very much influenced by the utilities
of other goods consumed by him. Indifference curve is free from this unrealistic assumption of
utility analysis.

(3) Free from Unrealistic Assumption of Constant Marginal Utility of Money: Marshal's
utility analysis is based on the assumption that marginal utility of money remains constant. In
real life marginal utility of money never remains constant. Indifference curve analysis free from
this unrealistic assumption of utility analysis. There is no need of this assumption at all under
indifference curve analysis.

(4) Based on Less Assumption: Superiority of indifference curve analysis stands established
because of the fact that despite having less assumptions than utility analysis it makes an
extensive study of the theory of demand. Indifference curve analysis is free from many,
unrealistic assumptions, like, utility can be added or subtracted, utility of a good depends
substitution effect. Utility of the goods depends on the consumption of that every good etc. This
special feature of indifference curve analysis according to hicks underlines the superiority.
(5) Explanation of Income and Substitution Effect: Because of assumption of utility analysis
that marginal utility of money remain constant, price effect cannot be divided into income effect
and substitution effect. On the contrary, under indifference curve analysis, price effect can be
divided into income effect and substitution effect. Indifference curve analysis explains to what
extent the effect of change in price is due to income effect and how much it is due to substitution
effect.

(6) Explanation of Giffen's Paradox: Giffens paradox relates to those inferior goods whose
demand falls with increase in income. But when price of these goods increases and real income
of the consumers falls, then their demand also increases. As such, demand curves of Giffen's
goods slope upwards from left to right (positive slope). Utility analysis fails to explain Giffen's
paradox. According to indifference curve analysis, due to change in the price of Giffen's goods,
negative income effect becomes more powerful than the negative substitution effect. Hence, due
to rise in price of these goods their demand also increases In this way, indifference curve
analysis is more extensive and realistic than Marshall, Theory of Demand

(7) Helpful in the Estimation of Welfare: One can know with the help of indifference curve
analysis the effect of change in price on the welfare of the consumer. if as a result of change in
price, the consumer moves to higher indifference curve it would mean increase in his welfare.
Change in price can be converted into change in real income with the help of indifference curve
analysis. On the basis of this technique, Hicks has attempted to measure Consumer's Surplus in a
more scientific way.

(8) More Realistic Foundation: The basis of utility analysis is law of diminishing marginal
utility. This law is based on many unrealistic assumptions, such as, cardinal measurement of
utility, etc. The basis of indifference curve analysis is law of diminishing marginal rate of
substitution which is based on more realistic assumptions. In the latter case there is no need of
measuring utility in cardinal numbers.
(9) It studies Combination of Two Goods Instead of One Good: The utility approach 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.

While the Indifference Curve technique is a two-commodity model which discusses consumer
behavior in the case of substitutes complementary and unrelated goods. It is thus superior to the
utility analysis.

(10) It Explains the Proportionality Rule in a Better Way: The Indifference Curve technique
explains consumers equilibrium in a similar but in a 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.

(11) It rehabilitates the Concept of Consumers Surplus: Hicks has explained the concept of
consumers surplus by dispensing with the unrealistic assumption of the marginal utility of
money. He regards consumers 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
consumers surplus is no longer a mathematical puzzle and has been freed from the
introspective cardinalism of the utility theory.

(12). It Explains the Dual Effects of the Price Effect: Utility analysis 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.

Further, when the price falls, the goods become cheaper. This Indifference Curve technique is
definitely superior to the utility analysis because it discusses the income effect when the
consumers income changes, the price effect when the price of a particular goods changes and its
dual effect in the form of the income and substitution effect.
Criticism of Indifference curve

(1) Unrealistic Assumptions: Indifference Curve analysis is based on the assumption that a
consumer has complete knowledge regarding scale of preference of two goods. In reality,
consumer is not computer. He cannot take quick decisions in real life in respect of different
combinations. Hicks in his book "Revision of Demand Theory" has also agreed with this
criticism.

(2) Complex Analysis: Indifference Curve analysis can explain easily that behaviour of the
Consumer which is restricted to the combination of only two goods. If the consumer wants
combinations of more than two goods, then indifference curve cannot explain easily his
behaviour. It requires complex mathematical assistance. Marshall did make a mention of this
indifference curve analysis in his book but because of its complexity he did not consider its study
necessary.

(3) Imaginary: According to Schumpeter, indifference Curve analysis is not based on the
experience of real life. Indifference curve analysis is based on imaginary combinations. A
consumer does not decide always like a computer as to which of the combinations of two goods
he would prefer.

(4) Ignores Combinations involving Risk: Many a time a consumer chooses such
combinations as involve risk and uncertainty. Indifference curve analysis does not study such
like combinations. Its scope, therefore, is also limited like that of utility analysis

(5) Introspective: According to Prof. Samuelson, indifference curve analysis is also concerned
with the mental activities of the man, in order to ascertain consumer's equilibrium through
indifference curve analysis, it becomes essential to know his mental functioning regarding choice
of combinations. Accordingly, Samuelson has tried to study consumer's equilibrium on the basis
of his behavior through Theory of Revealed Preference.
(6) Criticism on the Basis of Indifference: Indifference curve analysis is based on the
assumption that consumer knows which Indifference curve analysis is based on the assumption
that consumer knows which of the combinations of two goods yield him equal satisfaction. It is
then only that he shows indifference towards them. But Armstrong has criticized this
assumption. According to him, a consumer cannot make fine distinction between two
combinations in real life. So he treats them as yielding same utility. But as the difference of
combinations goes on increasing, difference of utility becomes evident and such a consumer does
not get same utility from different points on the same indifferent curve.

Fig.17

Supposing, points M, N, P, Q are located on indifference curve IC. Each of these points
represents different combinations of commodity-X and commodity-Y. These combinations are
different from the remaining 3 three combinations. It can be conceded that a consumer may be
indifferent between combinations represented by two close points. But according to Armstrong,
the consumer is indifferent between M and N not because the total utility of M combination
equal to the total utility of N combination, but because the difference in the total utilities of M
and N combinations is so minute that the consumer cannot express it. The same holds good in
case of combinations N and P or P and Q. But if we compare M combination with Q
combination, then there will be so much difference in their total utilities that the consumer will
be able to express them. Thu, indifference between M and N or P and Q is true because the
difference in their total utilities is too minute to be expressed by the consumer. However, it
cannot be true in case of M and Q, as the difference in their total utilities can be expressed.
(7) Assumption of Convexity: According to Koutsoyiannis, another limitation of indifference
curve is its assumption of convexity. This theory does not explain why an indifference curve is
Convex to the point of origin. In real life, it is not necessary that all goods should have
diminishing marginal rate of substitution.

(8) Old Wine in New Bottle: It does not find anything new in the indifference curve analysis
and considers it simply 'the old wine in new bottles.' Old terms have been replaced by new ones.
For example, instead of cardinal numbers such as 1, 2, 3, etc., ordinal numbers I, II, III, etc.,
have been used. Similarly, it makes use of scale of preference in place of utility and law of
diminishing marginal utility marginal rate of substitution in the place of law of diminishing
marginal utility. Likewise both analyses reach the same conclusion so far as consumer's
equilibrium is concerned

. (9) Impossible to Explain Diminishing MRS Without Diminishing Marginal Utility:

According to Prof. Armstrong diminishing marginal rate of substitution cannot be explained
without the help of diminishing marginal utility. When by giving up commodity-Y, one obtains
an additional unit of commodity-X, then marginal rate of substitution of commodity-X, for
commodity-Y goes on diminishing. It is so because the good whose quantity falls its utility
increases, on the other hand, the good whose stock increases its utility diminishes. It is evident,
therefore, that without the Concept of marginal utility one cannot explain marginal rate of
substitution.

(10) Laughable Combinations: When we consider different combinations of two goods, then
sometimes we come across such funny combinations that have no meaning for the Consumer For
instance, there is a combination of 10 shirts + 2 pairs of shoes. If in the subsequent combinations
shirts are given up to get more pairs of shoes, then we may arrive at a combination representing 2
shirts + 10 pairs of shoes. Will not this combination be ridiculous?
(11) Away from Reality: With regard to the assertion that the indifference curve technique is
superior to the cardinal utility analysis because it is based on fewer assumptions, Prof. Robertson
observes: The fact that the indifference hypothesis, the more complicated of the two
psychologically, happens to be more economical logically, affords no guarantee that it is nearer
to the truth. He further asks, can we ignore four- feeted animals on the ground that only two feet
are needed for walking?

(12) Unrealistic Assumption of Maximum Utility: As in the case of utility analysis,

indifference curve analysis is also based on the unrealistic assumption of maximum satisfaction.
In real life, a consumer is not so rational. While spending his income on different goods, a
consumer may not ensure satisfaction from such an expenditure. Laws relating to consumer's
expenditure are very much influenced by habits, customs, advertisement, demonstration effect,
fashion, etc. Under their influence, many a time, consumer has to buy such goods as may yield
him very little satisfaction.

(13) Combinations are not based on any Principle: Since the combinations are made
irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of
shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not
possess any significance for the consumer.

(14) Impractical: According to Morris, indifference curve analysis is also based on the
unrealistic assumption that goods are homogeneous. This assumption holds good only under
perfect competition. But perfect competition is an impractical concept. In real life , we find
monopolistic competition and oligopoly conditions of market. In these markets, there is lot of
product differentiation which has widen the scope of consumer choice. Indifference curve
analysis cannot explain satisfactorily.
 BIBLIOGRAPHY

http://www.wikipedia.org

http://www.economics.com

http://www.quora.com

http://www.business economics.com
Jain, T.R. and Sandhu, A.S. 2016
Business Economics Global Publishers. pp: 7-13
Koutsoyiannis, A. 2016
Theory of Econometrics. pp: 16-20
Ahuja, H.L. 2015
Principles of Macro Economics S. Chand
Publishers. pp: 21-23