Answer to Question #45904 in Microeconomics for Behailu

Question

Discribe the difference between the cardinal utility theory and the indifference curve analysiis?

Answer 1

Though cardinal utility theory is Marshall’s brilliant work to analyze consumer’s behavior, the indifference curve theory or ordinal utility theory outweighs the former because of its more realistic way to analyze consumer’s economic behavior. One of the major difficulties in studying consumer’s behavior is that it is impossible to predict human behavior. However, indifference curve analysis is considered the best tool to perform such a difficult task. Two important ordinalists are Hicks and Allen. Hicks and Allen opposed the idea of utility as a measurable entity and advanced indifference curve analysis as an alternative method to the cardinal utility theory. The indifference curve analysis definitely possesses certain distinguishable and unquestionable merits over Marshall’s cardinal utility analysis. The following are the undeniable merits of indifference curve analysis:

Marshall’s idea of constant utility of money just happens to be impractical. With his assumption of constant marginal utility of money, Marshall was unable to figure out the ‘income effects’ of a price change. Hence, he was unable to differentiate between ‘substitution’ and ‘income’ effects that are the two elements of ‘Price-effect’. Because of this, Marshall failed to produce any adequate details for Giffen Paradox. By splitting the price effect into income and substitution effects, Hicks makes it possible for us to enunciate substantially more general demand theorem. When it comes to Giffen goods, the negative income effect is stronger to overshadow the positive substitution effect; hence, the buyer purchases less of the particular commodity while the price decreases.

The Marshallian study of consumer behavior relies upon the unstable basis of the cardinal utility approach, which considers that utility is measurable and additive. This in accordance with Hicks and Allen is tremendously impractical and ambiguous. Because utility is a psychic-entity, it differs from individual to individual as well as from time to time. The fundamental benefit of the indifference curve approach is that it happens to be dependent on the ordinal utility function. It is certainly not deemed that the buyer is capable of gauging the quantity of utility resulting from any specified addition of a commodity. The only thing that is assumed is that the customer is able to choose the best composition of products and services, and also is able to reveal which combination of goods is preferred more than or less than or equally to another combination. As a result, the indifference curve method presents a much more practical way of measuring consumer’s satisfaction when held up against the first one offered by Marshall.