Economics Essay Example | Topics and Well Written Essays - 1500 words - 1

Economics - Essay Example Marshallian utility analysis is based on the assumption that utility is measurable and indifference curve analysis is based on the assumption that the consumer is able to tell his preferences among the various alternative combinations of the two commodities. These assumptions seem to be unrealistic and revealed preference theory is free from these unrealistic assumptions and it seeks to enunciate the demand from observed market behaviour of the consumer. The theory is based on the fact that ‘choice reveals preference’. 2. Critical Analysis of the Neo Classical consumption theories of Marshallian Utility analysis and Hicksian Indifference analysis 1) Unrealistic The Marshallian assumption of cardinal measurement of utility is very restrictive. It demands too much from the human mind. Utility is a mental phenomenon and the precision in the measurement of utility assumed by Marshall is unrealistic. It is criticised that new theory of indifference analysis only jumps from th e frying pan of the difficulty of measuring utility into the fire of the unreality of assuming consumer’s complete knowledge of all his scales of preferences or indifference map. The indifference curve technique envisages a consumer who thinks of innumerable possible combinations of goods and his relative preferences for them. 2) Absurd Indifference curves include even the most ridiculous combinations which may be far removed from a consumer’s habitual combinations. For example, while it may be perfectly sensible to compare whether three pairs of shoes and six shirts would give him as much satisfaction as two pairs of shoes and seven shirts. 3) Introspective Both the approaches of Marshallian Utility analysis and indiffence curve technique are based on the psychological or introspective method. The law of diminishing marginal utility, which is psychological in nature lies at the bottom of law of demand. Indifference curve too is based on introspection. This technique i s criticised as introspective and hence Samuelson introduced behaviourist method of devising demand theory. 4) Relation of Transitivity objected Armstrong has criticised the relation of transitivity involved in indifference curve technique. According to him, the consumer’s indifference arises from his inability to perceive the difference between alternative combinations of goods. This is due to the fact that the difference is too slight to be noticed. If that is true, the relation of indifference become non-trasitive. This knocks the bottom out of the whole system of indifference curve analysis. 5) Limited empirical Nature In Hicks-Allen theory, indifference curves are based on hypothetical experimentation. They are based on imaginary indifference curves, although attempts have been made recently to derive them experimentally. 4. Revealed Preference Theory The theory of Revealed Preference is associated with the name of Paul Samuelson and the theory is called the behaviourist ordinal utility theory. Instead of the unrealistic assumptions that the consumers operate with a complete and consistent scales of preferences set out in the form of indifference curves, most economists now prefer to analyse situations in which their hypothesis can be tested. Both