Indifference Analysis

Indifference Analysis

Indifference Analysis, a technique developed in recent years by economists in order to construct a more satisfactory theory of consumers' demand. Before the 2000's many economists held that a consumer derived a given amount of 'utility' from the goods or services he bought, that its amount was related to the quantities of commodities he already possessed, and that changes in utility arising from changes in the amount he possessed could be measured. During the inter-war years attention began to shift from this 'cardinal' aspect of utility to its'ordinal' aspect, i.e. to the view that it was unnecessary to assume that utility was measurable and that a more satisfactory theory of consumer behaviour could be constructed merely on the assumption that the utility from different combinations of commodities could be ranked in order of preference by consumers.

Indifference analysis is one aspect of this approach. It assumes that among various combinations of any two commodities, say bread and cheese, a consumer can distinguish combinations which are of equal utility to him and between which he is indifferent, so that he can rank different combinations in order of preference. A hypothetical 'map' of a consumer's preferences can then be constructed. A simple analogy is a map of a hill. Imagine a hill to be bounded by two roads at sea level, running respectively north and east from a point of origin. Any point on the hill may then be located by their distances north and east of the origin: the third dimension of any such point will be height above sea level, and contour lines may be drawn connecting all points of equal height. Similarly, if amounts of bread and cheese are measured oft along the east-west and north-south axes respectively of a graph, indifference 'contours' or curves can be drawn to show all combinations of bread and cheese yielding equal utility to a consumer. The farther to the north-east of the point of origin such curves lie, the higher the level of utility experienced. Given the money prices of bread and cheese and the amount of money income available to spend on them, the consumer may be presumed to choose the combination of bread and cheese which will place him on the highest indifference curve. This 'best' combination can be identified in terms of the relative marginal utility to the consumer of bread and cheese without saying anything at all about absolute amounts of utility derived from them separately.

Since it dispenses with the assumption that utility is measurable, indifference analysis may be regarded as a 'better' approach to the theory of consumer behaviour. Some economists have argued that the assumption of measurability is still implicit in the newer formulation. Indifference analysis as a technique has, however, been valuable in clarifying theoretical problems and suggesting solutions and has been used with advantage in many parts of economic theory.

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