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Uses Or Application Of Indifference Curve Study

Uses or Application of Indifference Curve Study
  • Problem of Exchange - With the indifference curve method the problem of exchange amidst two individuals can be conversed. We take two consumers A and B in fixed amount correspondingly. The problem is how they can exchange the commodities obsessed by each other. This can be unravelled by building an EdgeWorth Bowley box figure on the basis of their choice maps.

  • Effects of Subsidy on Consumers - The indifference Curve method can be used to gauge the effects of government subsidy on low earnings groups. We take a condition when the subsidy is not paid in money but the consumers are supplied cereals at dispensation rates the price difference being paid by the government.

  • The problem of Rationing - The indifference curve method is used to make clear the problem arising from diverse systems of rationing. Usually rationing comprises of setting specific and equal quantities of commodities to each individual. The other, rather liberal scheme is to allow an individual more or less quantities of the rationed commodities according to his liking. It can be demonstrated with the help of indifference curve study that the last scheme is definitely better and beneficial than the former.

  • Index Numbers: Measuring Cost of Living - The indifference curve study is used in measuring the cost of living or standard of living in terms of index numbers. We come to identify with the help of index numbers whether the consumer is better off or worse off by matching two time periods when the earnings of the consumer and prices of two commodities vary.

  • Earnings Leisure Trade-off and Supply of Labour - A worker's offer to supply his labour depends on his choices amidst earnings and leisure and the wage rate. Earnings and leisure are inversely allied, whereas there is a direct affiliation amidst earnings and hours per day. Leisure is always exchange for earnings. The supply curve of an individual worker can also be derived with the indifference curve method. His offer to supply labour depends on his choice amidst earnings and wage rate.

  • Effect of Earnings Tax Vs. Excise Duty - The indifference curve method in considering the benefit allegations of earnings tax vs. excise duty is sales tax. The question is whether an earnings tax hurts the tax payer more or an excise duty of an equal amount. In actual, the earnings tax is equivalent to an excise duty places the tax payer in a favourable position.

  • The Saving Plan of An individual - The indifference curve method can also be used to study the saving plan of an individual. An individual's choice to save depends upon his present and future earnings, his likings and choices for present and future commodities, their expected prices on current and future rate of interest and on the stock of his savings. As a matter of decision to save is influenced by the intensity of his desire for present commodities and future commodities.
Superiority Of Indifference Curve Method Over Utility Study

The indifference curve method as developed by Prof. Allen and Hicks is regarded as improvement over the Marshallian Utility study because it is based on fewer and more realistic postulations.

It is bestowed with cardinal Measurement of Utility and studies permutations of two commodities in the place of one. It supplies a better classification of commodities into substitutes and complements and make clears the Law of Diminishing Marginal Utility. It is free from the supposition of invariable Marginal Utility of Money and make clears the proportionality rule in a better way. It recuperates the concept of Consumer's surplus and make clears the law of stipulation more realistically. Thus the indifference curve method is definitely superior to the Marshallian introspective cardinals.

Criticisms of Indifference Curve

The indifference curve study is no doubt considered superior to the utility study but there are certain critics to it. Though it is said, it is actually away from reality. With regards to the assertion of that the indifference curve method is superior to cardinal study because it is based on lesser postulations. It is based on the substitutes and complements and in practical it cannot be had substitutes for all types of products and neither the complements. They are not subject to measurements. Schumpeter defines the indifference study as "the practical standpoint we are not much better off when drawing purely imaginary indifference curves than we are when speaking of purely imaginary utility functions." It fails to make clear the observed behaviour of the consumer and is non-transitive. The customer is not rational and combinations are not based on the principles. The actual consumer's behaviour is not analysed thoroughly on the choices involving risk or uncertainty. With the unrealistic hypothesis of perfect competition the real competition cannot be ascertained. Likewise all commodities are not divisible. Despite the criticisms, the indifference curve method is still regarded superior to Marshallian introspective cardinals.

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