Indifference Curve and Utility Approach: Similarities

The upcoming discussion will update you about the similarities between indifference curve and utility approach.

Similarity # 1. Assumption of Rationality:

Both the approaches assume that their consumers behave rationally. They behave rationally so as to maximize their utility or satisfaction. Marshall used the term utility. But Hicks and Allen preferred the term ‘satisfaction’ instead of ‘utility’. What is important to us is that what is ‘utility’ with Marshall is ‘satisfaction’ with Hicks.

Similarity # 2. Equilibrium Condition:

So far as the equilibrium condition of consumer is concerned, both the approaches believe in the proportionality rule. In Marshall’s analysis, a consumer reaches equili­brium when the ratios of the marginal utilities of various commodities, say X and Y, are equal to their price ratio of two goods. Symbolically,

MU_X/MU_Y = P_X/P_Y

In the indifference curve analysis, a consumer reaches equilibrium when the slope of the indifference curve, MRS_XY, is equal to the slope of the budget line, P_X/P_Y. Symbolically,

MRS_XY = P_X/P_Y

It is worth noting here that there is a relationship between marginal rate of substitution (MRS) and marginal utility (MU). As a consumer moves along an indifference curve his consumption of one good, say Y, decreases, while that of another good, say X, rises.

When the consumer sacrifices Y, his marginal utility for Y becomes -∆Y × MU of Y. But as consumption of X increases his MU for X becomes ∆X × MU of X. Since, on an indifference curve, satisfaction remains unchanged, decline in utility must be compensated by an increase in utility. That is,

– ∆Y.MU_Y = ∆X.MU_X

Or- ∆Y/∆X = MU_X/MU_Y

– ∆Y /∆X is the slope of the indifference curve which is nothing but MRS_XY.

So, one can write

MRS_XY = MU_X/MU_Y

It is thus clear that the equilibrium condition for both the approaches is the same:

MRS_XY (=MU_X/MU_Y) = P_X/P_Y

In the indifference curve analysis, MU_X/MU_Y has been substituted for MRS_XY.

Similarity # 3. Introspective Approach:

Both the approaches employ the method of introspection. Utility approach is labeled as “introspective cardinalisim” while indifference analysis is labeled as “introspective ordinalism”. Utility analysis is based on introspection. Like the utility analysis, indifference approach is also rooted in the introspectively derived ordinal utility functions of the consumers.

To this extent, this approach is also subjective. In view of this, Tapas Majumdar said:

“…the basic methodo­logical approach of Hicks-Allen is the same as in the Marshallian marginal utility hypothesis; it is, that is to say, mainly introspective…”.

Similarity # 4. Diminishing MU:

Both the approaches implicitly or explicitly assume diminish­ing marginal utility derived from a com­modity. However, diminishing marginal utility is explicitly recognized in utility analysis. The concept of diminishing marginal utility is implicit in the Hicks- Allen analysis. In this analysis, an indifference curve becomes convex to the origin because of diminishing MRS. And MRS is equivalent to MU_X/MU_Y.

Law of diminishing MU and the law of diminishing MRS are the two sides of the same coin.

Thus, what is clear from the above discussion is that there are striking similarities—rather than striking differences —between the two approaches.

Indifference curve analysis has simply substituted new concepts and equations in place of psychological or subjective concept of utility. It has simply changed the garb without altering the basic premise. In view of this, Robertson thinks that the indifference curve technique is just an ‘old wine in a new bottle’.