Indifference Curve – Meaning, Nature, Assumptions, Properties and Limitations

Posted on Jun 4 2020 - 12:49pm by Preeti

LIMITATIONS OF THE INDIFFERENCE CURVE THEORY

1. It was assumed that a consumer can rank his preferences. However, it is not always feasible for a consumer to be able to rank his preferences in reality.

2. The assumption that the consumer is rational has been criticized. It is not possible for the consumer to have complete knowledge about the conditions prevailing in the market.

3. The indifference curve theory does not contribute anything new. It has just attempted to replace some of the concepts of the cardinal utility theory, for example, marginal utility by marginal rate of substitution.

4. The indifference curve theory is unable to analyse the consumer’s behaviour in the face of risks and uncertainty.

5. As far as empirical evidence is concerned to support the indifference curve theory, the data available is limited.

APPLICATIONS OF INDIFFERENCE CURVE THEORY

1. In making decisions relating to price subsidy as compared with a supplementary income. By using the indifference curve analysis, the government can compare the welfare effects of the two options.

2. In making decisions relating to food stamps as compared with cash grant. The indifference curve is an effective technique to analyse the impact of a food stamp programme as compared with a cash subsidy by comparing the impact on the welfare of eligible families of the two types of subsidies.

3. Deriving the supply curve of labour by an individual worker. By combining the indifference curve and the wage line, one can derive the wage offer curve and thus the supply curve of an individual worker.

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