Question

Modern microeconomics, specifically consumer theory, is based on utility theory—consumers maximize their utility.

Where does our modern conception of utility theory come from? (Hint: there are multiple sources.)

What is the empirical basis for utility theory?

Can utility theory be considered scientific according to Karl Popper’s conception of science?

How about Kuhn or Lakatos?

What are the criticisms of utility theory and how would its supporters (e.g., Gary Becker) respond?

Are there any alternative paradigms? What are the flaws/limitations in these approaches?

Answer 1

Consumer theory is the study of how people decide to spend their earning given their preferences and budget constraints. Basically in all the theories it is assumed that the consumer always tries to maximize their utility by allocating their funds among a number of commodities.

The concept of Utility has been developed by a number of economists. The word Utility was introduced by Daniel Bernoulli referring to the total satisfaction received by consuming a good or service. It is important to understand the utility because it directly influences the demand.

Utility analysis can be classified into two approaches namely Cardinal and Ordinal Approach.

Cardinal approach was developed by Alfred Marshall in which he proposed that the utility can be measured. He suggested that we can quantify the satisfaction that we get through consumption of good or service.

Assumptions of cardinal approach

1. Utility is cardinal I.e., quantifiable

2. Utility can be added

3. At the time of Utility analysis homogeneous commodity must be consumed.

4. Consumers are rational and they try to maximize utility

5. Consumer spends all his income to maximize utility

6 Marginal utility of money is constant. Law of equimarginal utility.

The basic idea behind ordinal utility approach is that a consumer keeps number of pairs of two commodities in his mind which give him equal level of satisfaction. This means that the utility can be ranked qualitatively.

Unlike to cardinal approach here it is proposed that utility cannot be measured but satisfaction can be classified qualitatively. Under ordinal approach different bundles of goods could be ranked on the basis of consumers. Different consumers will be having different preferences hence their ranking will be different.

Based on consumers preferences the different bundles of goods are plotted on an xy plane and we get the indifference curve.

the marginal utility, law of diminishing marginal utility and law of equimarginal utility, marginal rate of substitution are used under cardinal and ordinal utility approach to study the consumer behaviour.

As per Karl Poppers concept of science utility theory can be considered scientific because it has all the four parts namely 1. Logical inferences 2. Theoretical terms such as utils, marginal utility, diminishing, ranking, indifferent 3. Observation such as taste and preferences, law of diminishing marginal utility 4. Corresponding rules such as law of equimarginal utility and marginal rate of substitution.