The technique of indifference curves has assumed special significance because of its application in almost every sphere of economic activity. A few such applications can be mentioned as follows:
Applications
1. In the theory of production:
The basic aim of a producer is to attain a low cost combination. Indifference curves are useful in the realization of this objective.
When we use these curves in the theory of production, they are called iso-product curves. Producer’s equilibrium i.e. low cost combination is obtained at the point where producer’s budget line becomes tangent to one of the iso-product curves on the map.
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2. In the theory of Exchange:
Prof. Edge worth used the technique of indifference curves to show the mutual gains from the exchange of two goods between two consumers.
Exchange makes it possible for both the consumers to reach a higher level of satisfaction. The process of shifting to the higher level of satisfaction is explained with the help of ‘contract curves.’
3. In the field of Rationing:
This technique can also be made use of in the field of rationing Ordinarily two commodities are rationed out to different individuals, irrespective of their preferences.
But if their respective preferences are considered and the amounts of the two commodities be distributed among consumers in accordance with their scale of preferences, each of them shall be in a position to search a higher indifference curve and satisfaction.
4. In the measurement of consumer’s surplus:
Indifference curve technique has rehabilitated the old Marshallian concept of consumer’s surplus that has lain buried almost for decades under the weight of unrealistic and illusory assumptions.
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Consumer’s surplus can be measured with the help of this technique without any need for making unralistic assumptions.
4. In the field of taxation:
The technique is also applied to test preference between a direct and indirect tax. With the help of indifference curves it can be shown that a direct tax is preferable to an indirect tax as regards its effects on consumption and satisfaction of the tax payer.
In view of the above application of the technique, it may be asserted that it forms an integral part of the modern welfare economics.
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However, there are certain writers who also assert that the indifference curves technique is merely ‘the old wine in a new bottle’ for example, Prof. Robertson is of the view that this analysis has substituted new concepts and equations in place of the old ones.