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Chapter: Civil : Engineering Economics and Cost analysis : Demand and Schedule

Limitations of Diminishing Marginaliluity

Diminishing Marginaliluity - Limitations



i. Utility  cannot be  measured  ca rdinally:  The  basis   of the  utility  analysis-  that  it  is measurable-  is          defective because utility  is a  subjective     and psycholo gical concept which cannot be measured cardinally.  In really, it can be measured ordinally.


ii. Single commodity model is unrealistic: The utility analysis is a single commodity model in which the utility of one commodity is regarded independent of the other. Marshall considered substitutes and complementary as one commodity, but it makes the utility analysis unrealistic.



iii. Money is an imperfect measure of utility : Marshall measures utility in terms of mone y, but  mone y is an incorrect and imperfect measure o f utility because the value of mone y often changes.


iv. Marginal utility of money is not constant: The fact is that a consumer does not buy only one commodity but a number o f commodities at a time. In this wa y when a major part of his income is spent on buying commodities, the marginal utility of the remaining stock of mone y increases.


v. Man is not rational: This assumption is also unrealistic because no co nsumer compares the utility and disutility from each unit of a commodity while buying it. Rather, he buys them  under the influence of his desires, tastesor habits. Moreover, consumer's incomeand prices of commodities also influence his purchases. Thus the consumer does not buy commodities rationally. This makes the utility analysis unrealistic and impracticable.


vi. Utility analysis does not study income effect, substitution effect a nd price effect: The utility analysis does not explain the effect o f a rise or fall in the income of the consumer on the demand for the commodities. It thus neglects the income effect. Again when with the change in the price o f one commodity there is a relative change in the price of the other commodity, the consumer substitutes one for the other. This is the substitution effect which the utility analysis fails to discuss.


vii.Utility analysis fails to clarify the study of inferior and giffen goods: Marshall's utility analysis of demand does not clarify the fact as to why a fall in the price of inferior and giffen goods leads to a decline in its demand.

viii.         The assumption that the consumer buys more units of a commo dity whe n its price falls is unrealistic:   It ma y be true in the case of food products like oranges, bananas, apples, etc. but not in the case of durable goods.

ix.        The utility analysis breaks down in the case of durable consumer goods like scooters, transistors, radio, etc. because they are indivisible. The consumer buys only one unit of such commodities at a time so the it is neither possible to calculate the marginal utility o f one unit nor can the demand schedule and the demand curve for that good be drawn. Hence the utility analysis is not applicable to indivisible goods.


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Civil : Engineering Economics and Cost analysis : Demand and Schedule : Limitations of Diminishing Marginaliluity |

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