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Managerial Economics Notes, Study notes of Managerial Economics

M. J. P. Rohilkhand UniversityManagerial Economics

Mahatma Joytiba Phule Rohilkhand University Lecture Notes Managerial Economics

Typology: Study notes

2021/2022

Available from 03/01/2023

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Mahatma Joytiba Phule Rohilkhand University
Lecture Notes
Managerial Economics
6.11 CRITICAL EVALUATION OF MARSHALL ’S
CARDINAL UTILITYANALYSIS
Cardinal mileage analysis of demand which we've studied over has been
criticised on colorful grounds.
The following failings and downsides of cardinal mileage analysis have
been refocused out
1) Cardinal measurability of mileage is unrealistic
Cardinal mileage analysis of demand is grounded on the supposition that mileage can
be measured in absolute, objective and quantitative terms. In other words, it is
assumed in this analysis that mileage is cardinally measurable. According to this, how important
mileage a consumer obtains from goods can be expressed or stated in cardinal
figures similar as 1, 2, 3, 4 and so forth. But in factual practice mileage can not be
measured in similar quantitative or cardinal terms.
Since mileage is a psychic feeling and a private thing, it can not be measured
in quantitative terms. In real life, consumers are only suitable to compare the reparations
deduced from colorful goods or colorful combinations of the goods. In other words,
in the real life consumer can state only whether a good or a combination of goods
gives him more or less, or equal satisfaction as compared to another. therefore,
economists likeJ.R. Hicks are of the opinion that the supposition of cardinal
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Mahatma Joytiba Phule Rohilkhand University

Lecture Notes

Managerial Economics

6.11 CRITICAL EVALUATION OF MARSHALL ’S

CARDINAL UTILITYANALYSIS

Cardinal mileage analysis of demand which we've studied over has been criticised on colorful grounds. The following failings and downsides of cardinal mileage analysis have been refocused out

  1. Cardinal measurability of mileage is unrealistic Cardinal mileage analysis of demand is grounded on the supposition that mileage can be measured in absolute, objective and quantitative terms. In other words, it is assumed in this analysis that mileage is cardinally measurable. According to this, how important mileage a consumer obtains from goods can be expressed or stated in cardinal figures similar as 1, 2, 3, 4 and so forth. But in factual practice mileage can not be measured in similar quantitative or cardinal terms. Since mileage is a psychic feeling and a private thing, it can not be measured in quantitative terms. In real life, consumers are only suitable to compare the reparations deduced from colorful goods or colorful combinations of the goods. In other words, in the real life consumer can state only whether a good or a combination of goods gives him more or less, or equal satisfaction as compared to another. therefore, economists likeJ.R. Hicks are of the opinion that the supposition of cardinal

measurability of mileage is unrealistic and thus it should be given up.

  1. thesis of independent serviceability is wrong mileage analysis also assumes that serviceability deduced from colorful goods are independent. This means that the mileage which a consumer derives from a good is the function of the volume of that good and of that good alone. In other words, the supposition of independent serviceability implies that the mileage which a consumer obtains from a good doesn't depend upon the volume consumed of other goods; it depends upon the volume bought of that good alone. On this supposition, the total mileage which a person gets from the whole collection of goods bought by him is simply the total sum of the separate serviceability of colorful goods. In other words, mileage functions are cumulative. Neo-classical economists similar as Jevons, Menger, Walras and Marshall considered that mileage functions were cumulative. But in the real life this isn't so. In factual life the mileage or satisfaction deduced from a good depends upon the vacuity of some other goods which may be either backups for or reciprocal with each other. For illustration, the mileage deduced from a pen depends upon whether essay is available or not. On the negative, if you have only tea, also the mileage deduced from it would be lesser but if along with tea you also have the coffee, also the mileage of tea to you would be comparatively less. Whereas pen and essay are complements with each other, tea and coffee are backups for each other. It's therefore clear that colorful goods are related to each other in the sense that some are complements with each other and some are backups for each other. As a result of this, the serviceability deduced from colorful goods are interdependent, that is, they depend upon each other. thus, the mileage attained from a good is not

that is, price effect is the sum of negotiation effect and income effect). also, as we shall see latterly, the supposition of constant borderline mileage of plutocrat together with the thesis of independent serviceability renders the Marshall’s demand theorem to be valid in case of one commodity. Further, it's because of the constant borderline mileage of plutocrat and thus the neglect of the income effect by Marshall that he couldn't explain Giffen Paradox. According to Marshall, mileage from a good can be measured in terms of plutocrat ( that is, how important plutocrat a consumer is prepared to immolate for a good). But, to be suitable to measure mileage in terms of plutocrat borderline mileage of plutocrat itself should remain constant. thus, supposition of constant borderline mileage of plutocrat is veritably pivotal to Marshallian demand analysis. On the base of constant borderline mileage of plutocrat Marshall could assert that “ mileage isn't only measurable in principle ” but also “ measurable in fact ”. But, as we shall see below, in case a consumer has to spread his plutocrat income on a number of goods, there's a necessity for modification of borderline mileage of plutocrat with every change in price of a good. In other words, in amulti-commodity model borderline mileage of plutocrat doesn't remain steady or constant. Now, when it's realised that borderline mileage of plutocrat doesn't remain constant, also Marshall’s belief that mileage is ‘ measurable in fact ’ in terms of plutocrat does not hold good. still, if in borderline mileage analysis, mileage is conceived only to be ‘ measurable in principle ’ and not in fact, also it virtually gives up cardinal dimension of mileage and comes near to the ordinal dimension of mileage.

  1. Marshallian demand therem can not authentically be deduced except in a one commodity case Hicks and Tapas Majumdar have criticised Marshallian mileage analysis

on the ground that “ Marshallian demand theorem can not authentically be deduced from the borderline mileage thesis except in a one- commodity model without contradicting the supposition of constant borderline mileage of plutocrat. In other words, Marshall’s demand theorem and constant borderline mileage of plutocrat are inharmonious except in a one commodity case. As a result, Marshall’s demand theorem can not be validity deduced in the case when a consumer spends his plutocrat on further than one good. In order to know the verity of this assertion consider a consumer who has a given quantum of plutocrat income to spend on some goods with given prices? According to mileage analysis, the consumer will be in equilibrium when he's spending plutocrat on goods in such a way that the borderline mileage of each good is commensurable to its price.

  1. Cardinal mileage analysis doesn't resolve up the price affect into negotiation and income goods The third failing of the cardinal mileage analysis is that it doesn't distinguish between the income effect and the substitutional effect of the price change. We know that when the price of a good cascade, the consumer becomes better out than ahead, that is, a fall in price of a good brings about an increase in the real income of the consumer. In other words, if with the fall in price the consumer purchases the same volume of the good as ahead, also he'd be left with some income. With this income he'd be in a position to buy further of this good as well as other goods. This is the income effect of the fall in price on the volume demanded of a good. either, when the price of a good cascade, it becomes fairly cheaper than other goods and as a result the consumer is convinced to cover that good for others. This results is increase in volume demanded of that good. This is

According to incuriosity wind analysis, in case of a Giffen Paradox or the Giffen good negative income effect of the price change is more important than negotiation effect so that when the price of a Giffen good falls the negative income effect outweighs the negotiation effect with the result that volume demanded of it falls. therefore in case of a Giffen good, volume demanded varies directly with the price and the Marshall’s law of demand doesn't hold good. It's because of the constant borderline mileage of plutocrat and thus the neglect of the income effect of price change that Marshall couldn't explain why the volume demanded of the Giffen good cascade when its price falls and rises when its price rises. This is a serious lacuna in Marshalllian’s mileage analysis of demand.