Table of Contents

Famous Figures and Diagrams in Economics

Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.

Chapter 3: Indifference Curves and Isoquants

Mark Blaug and Peter Lloyd

Subjects: economics and finance, economic psychology, history of economic thought

Extract

Mark Blaug and Peter Lloyd INDIFFERENCE CURVES Indifference curves and their use for the analysis of consumer behaviour were invented by Francis Ysidro Edgeworth in his Mathematical Psychics, published in 1881. After Edgeworth, Pareto in his Manual of Political Economy (1927/1972) made use of indifference curves to illuminate utility theory and preference relations between commodity bundles, without however acknowledging Edgeworth. Despite their use by Johnson (1913) and Slutsky (1915), indifference curves did not catch on until Bowley’s Mathematical Groundwork (1924) popularized them. The indifference curve is a graph in the goods space that shows different combinations of quantities of two goods between which the consumer is indifferent, that is, the consumer would not prefer one combination over another. A set of indifference curves is called an indifference map, that is, a representation of preference patterns of individual consumers. This is the basis of the economic theory of consumer demand. Indifference curves are also used widely in general equilibrium theory, as in the concept of Pareto efficiency (see Chapter 31, 34 and 36, on the Edgeworth Box diagram, the utility possibility frontier and Pareto efficiency). Fisher (1907) was the first to combine indifference curves and a production transformation curve to illustrate an individual’s optimum investment decision (see Chapter 55, on intertemporal utility maximization – the Fisher diagram). Indifference curves are typically defined only in the positive quadrant of commodity space. The preferences of the consumer or household are assumed to depend only on its own consumption of the two goods. Each indifference...

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