Difference between Utility Analysis and Indifference Curve Analysis

Difference between utility analysis and indifference curve analysis

The main difference between Utility analysis and Indifference curve analysis is that in utility analysis, the consumer behaviour is discussed with the commodities independent of each other whereas, in Indifference curve analysis, the commodities can be the substitute, complementary and unrelated goods.

According to Prof. Hicks,” Indifference Curve is an improved version of utility analysis.” 

But, Robertson believes that ” It is old wine in new bottles.” 

These both statements are true in the matter of facts as these both terms are similar in some respects and some respects, the indifference curve is more practical and extensive concept than utility analysis. 

To know the difference between these two, we must clear the meaning of these terms:

Utility Analysis:-

In Utility Analysis,  consumer Equilibrium refers to a situation where a consumer is getting maximum satisfaction by spending his income across different goods. At this situation, the consumer does not tend to change his expenditure pattern.

In other words, A consumer is in equilibrium when he allocates his limited income across different commodities to maximize his satisfaction or utility. Any change in the allocation of income will lead to a fall in total satisfaction to the consumer.

In the words of Tibor Scitovsky,

“A consumer is in equilibrium when he regards his actual behaviour as the best possible under the circumstances and feels no urge to change his behaviour as long as circumstances remain unchanged.”

Indifference Curve Analysis:-

In Indifference Curve Analysis, Consumer’s Equilibrium is defined as a situation when the consumer maximizes his satisfaction, spending his given income across different goods with the given prices. Here, the indifference curve and budget line are used to determine the consumer equilibrium point. Indifference curve analysis helps to find out how the consumer spends his limited income on the combination of different goods to get maximum satisfaction.

In other words, consumer’s equilibrium refers to a situation in which a consumer with given income and given prices purchases a combination of goods and services which gives him maximum satisfaction and he is not willing to make any change in it.

Chart of Difference between Utility Analysis and Indifference Curve Analysis :

Basis of Difference

Utility Analysis

Indifference Curve Analysis

Independent Commodities The main defect of this analysis that only independent goods are considered. Substitute goods and complementary goods cannot be studied under this. This analysis is free from this assumption. It studies all types of goods such as substitute, complementary and unrelated goods.

Measurement of utility

Here, the utility is quantitative and can be measured in cardinal numbers 2,4,6 and 8 etc. Here, the utility is orderable, not quantitative. Thus, the technique ‘ordinal measurement of utility‘ is used.
Assumption of Constant Marginal utility of Money It is based on the assumption that the marginal utility of money is constant. It is free from this unrealistic assumption of utility analysis as in real life, the marginal utility of money can never be constant.

Price Effect

Due to the assumption of constant marginal utility of money, the price effect cannot be split into the substitution effect and income effect. In this, the price effect can be split into income and substitution effect defining the extent of both effects separately.

Giffen-Paradox

Utility Analysis fails to explain Giffen paradox which shows the positively sloped demand curve for Giffen goods. It explains the Giffen paradox extensively by showing the strong negative income effect than the negative substitution effect due to a change in the price of Giffen goods.

Estimation of Welfare

This analysis does not help estimate consumer welfare as well as a change in real income due to a change in price. It helps in estimating the welfare of consumers due to a change in price by higher or lower indifference curves.

Based on unrealistic Assumptions

It is based on many unrealistic assumptions of utility such as it can be added or subtracted and based on the consumption of that commodity only.

It makes an extensive study of the theory of demand due to based on fewer assumptions.


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Difference between Utility Analysis and Indifference Curve Analysis 1 min 300x276 - Difference between Utility Analysis and Indifference Curve Analysis
Difference between Utility Analysis and Indifference Curve Analysis

 

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Difference between Utility Analysis and Indifference Curve Analysis

 

Conclusion:

Both these analyses prescribe almost identical conditions for consumer’s equilibrium yet indifference curve analysis helps a consumer reach consumer’s equilibrium without any unrealistic assumptions. Thus, indifference curve analysis is superior to the utility analysis.

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