Appendix to Chapter 6 Indifference

Curves

In Chapter 6 , we studied the theory of demand; here we extend the
theory by considering in more detail the assumptions about consumer
behaviour that underlie the theory of demand.

The history of demand theory has seen two major breakthroughs. The
first was marginal utility theory, which we used in Chapter 6. By
distinguishing total and marginal values, this theory helped to explain the
so-called paradox of value. The second breakthrough came with
indifference theory, which showed that the stringent assumption of
measurable utility (required for marginal utility theory) could be
dispensed with. Indifference theory is based on the much weaker
assumption that consumers can always say which of two consumption
bundles they prefer without having to say by how much they prefer it. In
other words, even if we are unable to measure a consumer’s utility,
indifference theory gives us a fully coherent way to think about individual
and market demand curves.

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