basic limitations of utility analysis
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Though the marginal utility analysis is helpful in various fields of economics, it has certain limitations as well. Some economists such as Prof. Hicks feel that the analysis may be useful to explore elementary economic behavior. However, the concept may be of no use when it comes to an advanced analysis of consumer behavior. The following are the important weaknesses of the marginal utility approach:
Unrealistic Assumptions
This is one of the most common criticisms against theories of social sciences. The theory of marginal utility is also subject to this criticism. According to critics, too many unrealistic assumptions haunts over Marshall’s utility theory. Because of these unrealistic assumptions, the theory becomes too vague. Critics confront the following assumptions of the theory:
1. Constant marginal utility of money
The theory states that marginal utility of money is constant. However, this is not the case in the real world. When money in your hand increases, the marginal utility derived from it decreases because of abundance. In real world, you can see affluent people being extravagant in their expenditures. Hence, according to the critics, money, as assumed by the theory, cannot be a measuring rod, as its own utility changes.
2. Utility is measurable
Cardinal utility theory claims that utility is measurable in cardinal numbers (1, 2, 3,….). However, utility is a subjective phenomenon, which can be felt by a consumer psychologically, and cannot be measured.
3. Complements and substitutes
The Marshallian utility theory ignores complements and substitutes of the commodity under consideration. The theory states that no complement or substitute of a commodity influences the utility derived from it. However, in real life, there are various complements and substitutes for a commodity. Hence, the utility derived from the commodity under consideration is subject to all those goods. For instance, the utility derived from a car depends upon fuel price also
4. Rationality
The theory assumes that the consumer is rational. However, various factors such as advertisement and ignorance can influence the consumer’s decision.
Income Effect and Substitution Effect
Prof. Hicks vehemently criticized that the marginal utility theory failed to throw light on income effect and substitution effect. When there is a change in the price of a commodity, two effects, namely income effect and substitution effect occur. However, this is not explained by the marginal utility theory. In the words of Hicks, “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.”
Similarly, Marshall was unable to relate the concept of marginal utility to Giffen goods. Hence, Giffen paradox remained as a paradox to Marshall as well
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Answer:
the basic limitation of utility analysis are the following
