Marginal utility influences and regulates the price determination of goods and services. There are differences of opinion among the economists regarding whether marginal utility analysis explains the law of demand or not. Vehement criticism was leveled against the utility analysis by the critics. Their criticism is explained as follows:
Criticism Of Marginal Utility Analysis
1. Utility-not measurable: The utility analysis assumes that utility is measurable and marginal utility and price are quantitatively related to each toiler. But utility is a psychological idea. We can’t measure it like other commodity. Hence the utility analysis is not a real one. ‘The assumption that utility of a commodity depends on it’s quantity alone is not correct. In fact the quantities of other goods also influence the utility of that goods.
2. Fails to consider the influence of income and substitution effects: Utility analysis ignored the study of income effect and substitution effect. It does not explain the effect of rise or fall in the income of the consumer on the demand for the commodities. It neglects the income effects. Similarly when there is a relative change in the price of other commodity, the consumer substitutes one for the other. This is the substitution effect. The utility analysis fails to discuss this as it is based on one commodity model.
3. Money is an imperfect measure of utility: This an analysis assumes that utility is measured in terms of money. But money is not a perfect measure of utility because the value of money changes. A fall or rise in the value of money influences consumption on behavior of an individual. Hence money is not a reliable measuring scale for utility.
4. man is not rational: The utility analysis is based on the assumption that man is rational. It considers that a consumer can calculate the utilities and dis-utilities of different commodities and buys only those commodities which give greater utility. But this assumption is not real because in practice, no consumer compares the utilities and dis-utilities from each unit of that commodity while buying a commodity. Besides, he buys different commodities on the basis of their prices and his income. Hence, the utility analysis is unrealistic and impractical.
5. Fails to clarify the study of inferior and Giffen goods: The utility analysis fails to clarify the fact as to why a fall in the price of inferior and Giffen goods leads to a fall in its demand. This fact was not discussed by the proponents of of utility analysis as they ignored the discussion of income and substitution effects.
6. Single commodity model — an unrealistic one: The utility analysis described single commodity model. It assumes that the utility of a commodity is independent from and uninfluenced by the utilities of other commodities. But in practice no commodity is independent from other commodities due to the availability of substitutes and complementaries.