Question

Describe how neoclassical and institutional economists approach the study of consumption. How do these approaches differ? What do you think are the advantages of each approach?
Economists inevitably approach their studies with certain assumptions about, among other things, human nature. What kinds of assumptions about who we (humans) are and what we fundamentally desire have you seen so far in this course? Do you agree with these assumptions or disagree, and why?

Answer 1

A) Neoclassical Economics is a broad theory that focuses on supply and demand as the driving forces behind the production pricing and consumption of goods and services. Institutional economics focuses on understanding the role of human made institution in shaping economic behaviour. institutions may include the family, the Corporation, the trade union ,the financial system the legal system and state government

Both of these School of economic thought differ in their approach towards the study of consumption.

The basis of neoclassical theory of consumption for Neo classical consumption modern is the the first postulation that 'individuals choose the time path of their consumption to maximize utility.Neo classicals explain consumer behaviour with respect to utility maximisation. The first insight of neoclassical near consumption model is that one can make a great deal of progress by thinking of time as involving only two periods :today and future. people may earn income in today and in the future ,consume today and in the future and key decision they have to make is how much consume today verses in the future .This the essence of neo classical model the consumption model has two main elements the intertemporal budget constraint and utility function.

Theory of consumption within the institutionalist conception of the economy is inseparable from the general theory of cultural and economic evaluation .The earliest coherent treatment of consumer behaviour within this holistic and evolutionary perspective was that of famous American economist Veblen in his book,The theory of leisure class:An Economic study of institutions published in 1899.lts a detailed critique of consipicous consumption.

Advantages of Neo classical approach

*It simplifies the consumer theory

*It brought out the fact that a consumer's first concern is to maximize satisfaction

*Neoclassical approach has given greater importance to individual behaviour (Jevons developed the the concepts of hedonism)

*Explains the problem of multiple choices.

Advantages of institutionalist approach

*Brought out the influence of institutions on consumer behaviour as well as rationality

* Provided exceptions to the law of demand.

*Analysis of business cycles were a part of their approach .

*Introduced and popularised the concepts like pecuniary canons of taste,Fortuna, and pecuniary emulation.

b) Economic theories from the beginning have made certain assumptions about human behaviour.Main assumptiond among them.are as follows,

*lndividual is rational

*Everyone's goal is to maximize their satisfaction.

*There are unlimited wants and limited resources,so choices must be made by individuals.

*Consumer preferences are transitive.

*Consumer has consistency in choice.

It is infact difficult to agree with these assumptions.Lets look at the first assumption itself,which states that consumer is rational.The existence of bandwagon effect, Snob effect and Veblen effect proves otherwise.

As per the second assumption, consumer always tries to maximize his satisfaction.Bit the measurement of satisfaction is a tricky business

With a huge income,or wealth consumer won't really have to make choices especially in a two goods market or economy.

Similarly the utility consumer may be getting from two commodities will be different in different circumstances.For example, ln case of hot weather,one will prefer to lcecream to coffee while coffee will be preferred to icecream in cool weather.

In short, human behaviour is really complex . However while establishing new theories we must take into account as much as possible.