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Indifference analysis


The analysis of consumer demand based on the notion of ordinal utility. The consumer is thought of as having a given amount of money available to him to spend and as being faced with given prices of all the goods he might consume. He will then decide on some set of quantities of the goods to buy given his tastes, the money available and their ptices. The basic problem of consumer demand analysis is then (a) to clarify how these factors interrelate to determine the consumer's pattern of purchases, (b) to see what can be said about the nature of the equilibrium position, and (c) to predict the effects on his purchases of various kinds of changes in prices, incomes and tastes. In doing this, indifference analysis rejects the idea that the consumer's tastes can be represented by measurements of the 'amounts of utility' various quantities of the different goods yield him. Indeed, it shows that such measurements are unnecessary for the purpose. It assumes instead that, faced with a set of alternative 'bundles' of goods (where one 'bundle' differs from another in having different amounts of the same collection of goods), the individual is able to rank them all in order of preference. That is, given any two bundles, he is able to tell us whether he prefers one to the other or whether he is indifferent. Indifference means that he regards them as equally desirable, or equivalent. On the basis of this very mild assump­tion, together with the further assumption that his preference ordering possesses a certain kind of consistency, a model of the consumer is constructed which is then used to analyse the problems described above.

Reference: The Penguin Dictionary of Economics, 3rd edt.