Short Essay on the Theory of Value and Indifference Curve

In the theory of value, an indifference curve is defined as the curve representing indefinite points of alternative combinations of two goods yielding the same amount of satisfaction or utility to the consumer.

Similarly, to illustrate demand factors in international trade theory, the device of community indifference curve is adopted by many economists like Scitovsky, Venek and Leontief. A community indifference curve is an aggregate indifference curve for all residents of a given country.

It represents the preference patterns for the whole community or nation. As Heller puts: “The collection of commodity combinations between which the consumers together are indifferent defines, the community indifference curve for a given country.”

According to Mishan, a community indifference curve may be defined as a locus of combinations, or ‘bundles’ of goods as between which the community is indifferent, that is to say, for any point on the curve it is not possible to make ‘everyone’ in the community better off.

Following Professor Bo Sodersten, in order to derive a community indifference curve, let us take up a simple case of two individuals representing a community. Each of the two individuals X and 7 possesses a certain quantity of wine and cloth in the beginning. With these initial resources, both are trading with each other and seek to achieve the best possible point of exchange. As in Figure 4.2 (A) this point (Q1) may be described as efficient point. At point Q1, consumer X has satisfaction level (u)x and consumer 7 has (u)x level of satisfaction.

Now, if we take away some quantity of wine from the original commodity of X and Y, then some appropriately more cloth is to be given to both the consumers to retain their previous satisfaction level Q1 We may thus get point Q3 Adjoining locus of points and 03 we get curve C/C1, called community indifference curve. It is convex to the origin and has a downward slope. If, however, quantities of wine and cloth (national income) are increased, new points R1, R, R2 etc. appear as the efficient points and curve CIC2 is derived [See Figure 4.2 (B)]. A higher community indifference curve indicates greater utility. Thus, when a community moves towards higher CIC, it implies an increase in welfare. It must be noted that, here we have assumed constant income distribution.

If income distribution is changing, then two community indifference curves may intersect as in Figure 4.2(C). This implies that for a certain income distribution, Q1 Q and Q3 points are indifferent to each other, whereas, for another income distribution Q2, Q and QA are indifferent points. In such case, it is not possible to make comparison between the two situations as a result of increase in wealth, that is, upliftment of production possibility curve (the opportunity cost curve).

Thus, for the sake of comparison, non-intersecting curves with a constant distribution of national income are to be assumed.