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Unit-4: Ordinal Utility Theory: Indifference Curve Approach

a practical description. There is no parameter by which we can know the satisfaction to buy or use of Notes
a product. But consumers can compare the satisfaction with various products or from various units
of a product. This is called the ordinal measurement of utilities. For example, if you use a cup of tea
and a cup of coffee then you can only say that from which cup you get maximum satisfaction. But
you cannot describe this satisfaction with cardinal numbers like 50 units or 40 units. Ordinal word
means to put ranking as first, second, third, etc. Indifference curve analysis is based on the ordinal
measurement of utility.
Marginal curve analysis was first proposed by English economist Edgeworth in 1881 in his book
‘Mathematical Psychics’. This concept was developed by Italian economist, Pareto in 1906, by British
economist W. E. Johnson in 1913 and by Russian economist Slutsky in 1915. The credit of rendering this
analysisas an important tool in demand theory goes to Hicks and Allen in 1934. They have presented
this scientifically in their article, ‘A reconsideration of the theory of value.’ Hicks has discussed it in
detail in his book ‘Value and Capital’.

4.1 What is an Indifference Curve?

Indifference curve is that curve that represents those various combinations of two commodities that
provides equal satisfaction to consumers. This means that all the points located on the indifference
curve represent those combinations of two products that provide equal satisfaction to consumers.
As the combinations represented by all the points yield same satisfaction, the consumers, therefore,
become indifferent in their choice i.e. gives equal importance to all combinations on the indifference
curve.
H. L. Varian opines, “An indifference curve represents all combinations of two commodities that provide
the same level of satisfaction to a person. That person is therefore, indifferent among the combinations
represented by the points on the curve.”

The Meaning of Indifference is Lack of Difference
Commodity X and commodity Y have two different combinations X , Y and X , Y , which give same satisfaction to
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2
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the consumer. Consumer will be indifferent in relation to these combinations i.e. there will be no difference between the
combinations X , Y and X , Y for him, in content of level of satisfaction.
1 1 2 2
Indifference curve is that curve which represents those various combinations of commodity X and Y which provide him
same satisfaction.
According to Koutsoyiannis, “An indifference curve is the locus of points, particular combination
of goods, which yield the same utility to the consumer, so that he is indifferent as to the particular
combinations he consumes.”

4.2 Indifference Schedule

An indifference schedule refers to that schedule which indicates different combinations of two
commodities which yield equal satisfaction. A consumer, therefore, gives equal importance to each
of the combinations. In other words, he becomes indifferent 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.”
The following (pg. 44) schedule indicates different combinations of apples and oranges that yield equal
satisfaction to the consumer.

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