Main Shortcomings of Utility Analysis
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Main Shortcomings of Utility Analysis

Main Shortcomings of Utility Analysis The utility analysis refers to the theory of consumer demand propounded by Marshall. This theory is based on the cardinal measurement of utility and on certain utilitarian premises. The marginal utility analysis has developed two laws, viz., the law of diminishing marginal utility and the law of equi-marginal utility and with the help of these two laws of consumer behavior, it has derived the law of demand. But this analysis suffers from the following shortcomings: —

Main Shortcomings of Utility Analysis

The utility analysis refers to the theory of consumer demand propounded by Marshall. This theory is based on the cardinal measurement of utility and on certain utilitarian premises. The marginal utility analysis has developed two laws, viz., the law of diminishing marginal utility and the law of equi-marginal utility and with the help of these two laws of consumer behavior, it has derived the law of demand. But this analysis suffers from the following shortcomings: —

(i) The utility analysis assumes that utility is cardinally measurable, i.e., it can be assigned definite numbers. But it is wrong to say that utility can be measured cardinally. Utility is subjective and as such it cannot lie measured. We can only say whether satisfaction is more or less. We cannot say exactly how much. That is, ordinal measurement is possible and not cardinal measurement.

(ii) The utility analysis further assumes that utilities are independent. That is why it is said that utility of a commodity varies with its quantity and of that commodity alone. But the fact is that commodities are interlinked and the utility of one is influenced by that of another.

(iii) Besides, the utility analysis does not fully bring out the income effect and substitution effect of a change in price. It is unable to explain how much of the increased demand for a commodity is due to the income effect and how much to the substitution effect when price of the commodity has changed. As Hicks says, "The distinction between direct and indirect effects of a price change is accordingly left by the cardinal theory as an empty box, which is crying out to be filled."

(iv) Also, the utility analysis assumes that the marginal utility of money remains constant as a consumer goes on spending the money on the purchase of a commodity. This is not correct, because as the amount of money goes on decreasing, its marginal utility must rise.

(v) Finally, the utility analysis fails to explain the demand for certain commodities which are big and indivisible, e.g., a house, a car.

In view of these shortcomings of the utility analysis, modern economists have adopted a new technique, called the indifference curve technique, to explain consumer demand.

 

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Comments (1)

Wonderful explanation. Thank You!!!1

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