MARSHALL’S UTILITY ANALYSIS AND HICKS’ INDIFFERENCE CURVE ANALYSIS: A COMPARISON (CARDINAL UTILITY VERSUS ORDINAL UTILITY) Marginal utility theory of demand was developed by Alfred Marshall to explain consumer’s equilibrium. Later Hicks and Allen developed the indifference curve analysis to explain consumer behaviour. There are certain similarities and differences between the two analyses. SIMILARITIES 1. Assumption of Rationality: Both the analyses assume that the consumer is rational in the sense that he tries to maximize utility or satisfaction, The objective of the consumer's maximization of utility in the Marshallian utility analysis whereas the consumer's aim is to reach the highest possible indifference curve and thus seeks to maximize the level of satisfaction in Hick’s theory. 2. Condition of Consumer Equilibrium: The condition of consumer equilibrium in Marshallian utility analysis is that the marginal utilities of various goods are proportional to their prices. MUx _ Px Muy Py According to the indifference curve analysis, consumer is in equilibrium when the MRS between the two goods is equal to the price ratio between them Price of X MRSxv = rice of ¥ This equality condition is equivalent to the Marshallian condition that utilities are proportional to their prices. 3. Method of Introspection: Another similarity is in the use of the introspective method. In Marshallian analysis, the law of demand is explained by the psychological law of diminishing utility which is based up on the method of introspection. Similarly, Hicks — Allen analysis derives the indifference curve map from hypothetical experimentation on the consumer. 4, Adoption of Diminishing Marginal Utility: Marshallian theory is explicitly based on the principle of diminishing marginal utility. In the case of indifference curves their convexity implies that the MRS of X for Y diminishes as more and more of X is substituted for Y. behind this principle too, the diminishing marginal utility principle operates. DIFFERENC] (Superiori of Indifference Curve Analysis Over Marshallian Utility Analysis) According to Hicks, indifference curve analysis is an improvement over the utility analysis of Marshall in the theory of consumer behaviour. The following are the important differences between Marshallian cardinal utility analysis and that of the indifference curve analysis. 1. Ordinal versus Cardinal Measurability of Utility: Marshallian analysis is based on the cardinal measurability of utility. According to this the consumer is able to assign cardinal numbers to the amount of utility derived from the consumption of different goods.6. Indifference curve analysis assumes ordinal measurement of utility. Here the consumer is only ranking his preferences without assigning numerical values. The ordinal measurement of utility is more realistic than Marshall’s cardinal measurement. Demand Analysis Without Constant Marginal Utility: Analysis of demand without assuming constant marginal utility of money is another superiority of indifference curve technique over Marshall's theory. The indifference curve technique can derive the demand theorem without the assumption of constant marginal utility of money. Decomposition of the Price Effect: Another superiority of the indifference curve analysis is its ability to split up price effect analytically into income effect and substitution effect. By assuming constant marginal utility of money, Marshall ignored the income effect of a price change Hypothesis of Independent Utilities Given Up: Marshall assumed independent marginal utilities. According to him, the utility of a commodity is a function of the quantity of that commodity alone. Actually, utilities are interdependent. The indifference curve analysis recognizes the effect of substitutes and complimentary goods on the utility of a commodity. More General Theory of Demand: The positively sloping demand curve of a Giffen good is an exception of Marshall’s law of demand. Marshall was not able to explain Giffen’s paradox. But the indifference curve technique is able to explain the Giffen effect by distinguishing between the income and substitution effect of a price change. Fewer Assumptions: The remarkable fact about the indifference curve analysis is that it arrives at the same equilibrium condition for a consumer as that of Marshall, but with less restrictive and fewer assumptions than Marshall does. Realistic Measure of Consumer’s Surplus: Indifference curve analysis provides a more realistic measure of consumer's surplus. Marshallian concept of consumer's surplus is based on the assumption that utility is cardinally measurable in terms of ‘money and that the utility of money remains constant, Indifference curve analysis is not based on these unrealistic assumptions in the explanation of consumer's surplus.