NATURE AND METHODOLOGY OF ECONOMICS

Dr. J.N.Keynes was not far wrong when he said that Political Economy is said to
have strangled itself with definitions. There are, therefore, economists like Richard
Jones and Comte who would do away with the definition altogether. Economists like
Pareto, Myrdal and Hutchinson think that any search for precise definition of
Economics is a barren enterprise. Pareto thinks it a waste of time to investigate what
it (i.e., economic phenomenon) may be. According to Myrdal, Economics is the
only term regarding the precise definition of which the economist need not be
concerned. That is why it is said that it is needless to waste words in defining
Economics. It will be an exercise in futility.
Robbins, however, has stoutly denied that it is a waste of time to attempt a
precise delimitation of the field of Economics. According to Macfie, lack of clear
definition can prove harmful.
In our opinion, it is very essential for a student to have some definition in
mind as a working basis. Besides, the discussion leading to a definition is very useful
in giving a clear understanding of the subject. Let us, therefore, examine some of the
definition put forward from time to time.

EARLY DEFINITIONS: SCIENCE OF WEALTH

Adam Smith and his distinguished followers called classical economists defined
economics as a science of wealth. Adam Smith (1723 1790) in his famous book An
Enquiry into the Nature and Causes of the Wealth of Nations described economics as
a body of knowledge which relates to wealth. According to him if a nation has large
amount of wealth, it can help in achieving its betterment. Adam Smith defined
economics as the study of nature and causes of generating of wealth of a nation.
Adam Smith emphasized the production and expansion of wealth as a subject matter
of economics. The early economists called Economics, the Science of Wealth.
J.E.Cairnes in his book, The Character and Logical Method of Political Economy
clearly said that Economics, deals with the phenomenon of wealth. According to
the French economist Prof.J.B.Say, Economics is the science which treats of
wealth. The American economist F.A.Walker says that Economics is that body of
knowledge which relates to wealth. Ricardo, another British classical economist
shifted the emphasis from production of wealth to the distribution of wealth in the
study of economics. Thus, in these definitions, a key position was assigned to wealth
in the study of Economics. According to Malthus Man is motivated by self interest
only. The desire to collect wealth never leaves him till he goes into the grave. The
main points of the definitions of economics given by the above classical economists
are that (1) economics is the study of wealth only. It deals with consumption,
production, exchange and distribution aspects of wealth. (2) Only those material
goods which are scares are included in wealth.
CRITICISM OF THE DEFINITION:
The definition given by Adam Smith and other classical economists were severely
criticized by social reformers and men of letters of that time Ruskin and Carlyle. They

dubbed economics as a dismal science and a science of getting rich. Ruskin called
Adam Smith as the half bred and half witted man. The main criticism levied on
these definitions is as under:
1. Too much important to wealth. The definitions of economics given by
classical economics give primary importance to wealth and secondary
importance to man. The fact is that the study of man is more important than
the study of wealth.
2. Narrow meaning of wealth. The word wealth in the classical economists
definitions of economics means only material goods such as chair, book, pen
etc. These do not include nonmaterial goods such as services of doctors,
nurses etc.
3. Concept of economic man. According to wealth definitions, man works only
for his self-interest social interest is relegated in the background. Dr. Marshall
and his followers were of the view that economics does not study a selfish
man but a common man.
4. No mention of mans welfare. The Wealth definitions ignore the
importance of mans welfare. Wealth is not be all and the end all of all
human activates.
5. It does not study means. The definitions of economics lay emphasis on the
earning of wealth as an end in itself. They ignore the means or recourses
which are scarce for the earning of wealth.
6. Defective Logic. The definitions of economics given by classical economists
were unduly criticized by the literary writers of that time. The fact is that what
Adam Smith wrote in his book. Wealth of Nations in 1776 even now is
widely accepted. The central argument of the book that market economy
enables every individual to contribute his maximum to the production of
wealth of nation still not only holds good but is also being practiced and
advocated throughout the capitalistic world. Since the word wealth did not
have a clear meaning, therefore the definition of economics became
controversial. It was regarded unscientific and narrow. At the end of 19th
century, Dr. Alfred Marshall gave his own definition of economics and therein
he laid emphasis on man and his welfare.

MARSHALLIAN
WELFARE.

DEFINITION:

SCIENCE

OF

MATERIAL

Alfred Marshal was the first economist who shifted emphasis of economics from
wealth to welfare. He explained that economics is the science of human welfare, and
not the science of wealth. He preferred human welfare to wealth and explained that
wealth is for man and man is not for wealth. Wealth is not the end but only a means to
an end of human welfare. He defined economics in his book Economics of Industry
as follows:
Economics is a study of mans actions in the ordinary business of life. It enquires
how he gets and how he uses it. Thus, it, on the one side, is a study of
wealth and, and on the other more important side a study of man
Lionel Robbins led on frontal attack on the Marshallian view in the study of
economics.
According to him and other economists, main criticisms of welfare definitions are as
follows:
1. Welfare is not measurable. It varies from individual to individual, person to person
and age to age. A thing may give pleasure to a person but it may be harmful for the
others. There is not any instrument for its measurement. Robbins criticizes the idea of
welfare. It is difficult to decide what welfare is and what not welfare is. There are
many activities which do not promote the human welfare but they are regarded
economic activities e.g. the manufacturing and sale of alcohol etc.
2. Marshall's definition has limited the scope of economics. As according to Marshall
economics is concerned only with material welfare. According to him all those
activities which do not promote the material welfare are totally ignored. As they are
immaterial. Robbins does not think it right for the economists to confine their
attention to the study of material welfare, because in the actual study of economic
principles, both the material and immaterial are taken into account. Robbins rejected
Marshall's definition as being classificatory because it makes a distinction between
material welfare and non-material welfare and says that economics is concerned only
with material welfare.
3. As Marshal said Economics is a study of mankind in the ordinary business of life. It
is difficult to know, what is the difference between ordinary course of business and
extra ordinary course of business?

ROBBINS DEFINITION: SCIENCE OF SCARCITY OR SCIENCE

OF CHOICE.
Lionel Charles Robbins, Baron Robbins, (22 November 1898 - 15 May 1984) was
a British economist and head of the economics department at the London School of
Economics. Robbins is famous for his definition of economics:
"Economics is a science which studies human behavior as a relationship
between ends and scarce means which have alternative uses."
A follower of William Stanley Jevons and Philip Wicksteed, he was influenced by the
Continental European economists: Lon Walras, Vilfredo Pareto, Eugen von BhmBawerk, Friedrich Hayek, Friedrich von Wieser and Knut Wicksell. Robbins
succeeded Allyn Young in the chair of the London School of Economics in 1929.
Among his first appointments was Friedrich A. Hayek, who bred a new generation of

English-speaking "continentals" such as John Hicks, Nicholas Kaldor, Abba Lerner

and Tibor Scitovsky. Frank Knight was an American influence on Robbins.
Robbins was very familiar with the work of economists in Continental Europe.
Robbins became involved in the socialist calculation debate on the side of Friedrich
Hayek and Ludwig von Mises, and against Abba Lerner, Fred Taylor, and Oscar
Lange.
Robbins was initially opposed to Keynes's General Theory, and the evolution of his
explanation of economic development has been criticized several times. His 1934
treatise on the Great Depression is an analysis of that period. Robbins saw his London
School of Economics as a bulwark against Cambridge, whether it was populated by
Marshallian or Keynesians. However, he was eventually to recant and accept the
Keynesian Revolution. Robbins' 1966 Chichele lecture on the accumulation of capital
(published in 1968) and later work on Smithian economics, The Theory of Economic
Policy in English Classical Political Economy, have been described as imprecise.[2]
Although the ascendancy of the London School of Economics is foremost among
Robbins' legacies, he was a free market economist who was also greatly responsible
for the modern British university systemhaving advocated in the Robbins Report its
massive expansion in the 1960s.[3] He became the first Chancellor of the new
University of Stirling in 1968. He also advocated massive government support for the
arts, in addition to universities.
In the latter part of his life, Robbins turned to the history of economic thought,
publishing various classic studies on English doctrinal history. Robbins' L.S.E.
lectures, as he gave them in 1980 (more than fifty years after he first taught the
subject upon his appointment in 1929), have been published posthumously (see 1998).

MICRO AND MACRO ECONOMICS

In recent years, the subject matter of economics has been divided into two branches:
micro and macro economics. These terms were introduced by Prof. Ragnar Frisch of
Oslo University in 1933. Since then, these concepts have been adopted by economists
all over the world.
MEANING AND DEFINITION OF MICRO ECONOMICS
The term micro has been derived from Greek word Mikros which means small.
Microeconomics, the study of the economic behaviour of small economic groups such
as individual firms, individual households, individual consumer and small groups of
individual units such as various industries and market. The term micro economics has
been defined as under:
1. Micro economics is the study of a particular firm, particular household,
individual price, wages, income, industry and particular commodity.
Prof.K.E.Boulding
2. Micro economics is concerned with the economic activities of economic units
such as consumer, resource owners and business firms.
-Prof.Leftwitch

3. Price theory is the main tool of micro economics

-Prof.Schultz

SCOPE OF MICRO ECONOMICS

Micro economics studies the individual units of an economy. It includes the
determination of price for a commodity, determination of price for a factor of
production and the principles of welfare economics. Scope of micro economics
can be illustrated with the help of following diagram.
Micro Economics

Product Pricing
Welfare

Theory of Demand

Wages

Factor Pricing

Theory of Economic

Theory of Production
& Cost

Rent

Interest

Profit

Thus, it may be concluded that a study of an individual unit of economy is the

subject matter of micro economics. Demand theory, supply theory, price theory
and welfare economics are the important fields of study of micro economics.

IMPORTANCE OF MICROECONOMICS
It is an important method of economic analysis which Prof. Keynes regards as a
necessary part of ones apparatus of thought.
1. Helpful in the efficient employment of resources2. Helpful in Price Determination- Micro economics explains how the relative
prices of various factor of production are determined. It also explains how the
various factors of production are utilized in the production of goods and
services.
3. Helpful in understanding the whole economy- An economy is made up of
individual units. Therefore, the study of economic activities and behavior of
these units helps in understanding the whole economy.
4. Helpful in the formulation of economic policies of government- All the
economic policies of government are affected by the working of individual

economic units. As micro economics studies the activities of such unit, it

furnishes analytical tool for economic policies.
5. Helpful in decision making of an individual-Micro economics helps
individuals in decision making. It helps an individual consumer in deciding
how to spend his income to get maximum satisfaction and an individual
producer in deciding how to allocate his productive resources to get maximum
production at minimum cost.
6. Helpful in the formulation of Economic Laws-Micro economics is the base
of formulating economic laws. Basic tools of micro economics is marginal
analysis which helps in formulating fundamental economic laws such as the
law of diminishing marginal utility, the law of equi-marginal utility, the theory
of consumers surplus, the theories of determination of rents, wages, interest
and profit etc.

LIMITATION OF MICRO ECONOMICS

1. Based on impractical assumptions-Micro economics is based on certain
assumptions like full employment & perfect competition etc. These assumptions
do not hold true in real life.
2. It does not provide real picture of the whole economy-Study of only
individual economic units is the subject-matter of micro economics but it does not
provide the complete and real picture of an economy because the study of
individual units should be based upon the study of facts and circumstances in
which these units are working.
3. Results of Micro analysis do not apply on the whole- Results of micro
analysis do not apply on the whole economy. For example, saving is necessary
for an individual but not for an economy.
4. It does not Help in the solution of Problems of National Importance-It is
not of much helping the solution of economic problems of national importance
such as monetary policy, fiscal policy, employment policy, public finance etc.

DIFFERENCE BETWEEN MICROECONOMICS AND MACRO

ECONOMICS
1.The objectives of micro economics on demand side is to maximize utility and on
supply side is to maximize profits. Whereas, the main objective of
macroeconomics are full employment, price stability, economic growth.
2. The basis of microeconomics is the price mechanism which operates with the
help of demand and supply forces. Whereas the basis of macroeconomics is
national income, output and employment which are determined by aggregate
demand and aggregate supply.

3. Micro economics is based on the assumption of rational behavior of individuals.

Whereas macroeconomics bases its assumptions on such variables as the
aggregate vol. of the output of an economy, etc
4. Micro economics is based on the partial equilibrium whereas macro economics
is based on general equilibrium.
5. Micro economics is suitable to study the problems of individual economic units.
Whereas macro economics is suitable for the problems of economy as a whole.

THEORY OF DEMAND
People demand goods because they satisfy the wants of the people. The utility is the
want satisfying power of a commodity. It is also defined as property of the commodity
which satisfies wants of the consumers. The desire for a commodity depends by a
person depends upon the utility he expects to obtain from it. The greater the utility he
expects from a commodity, the greater his desire for that commodity. It should be
noted that no question of ethics or morality is involved in the use of the word, utility
in economics.

MEANING OF DEMAND
In economics, demand is the desire to own anything and the ability to pay for it and
willingness to pay. The term demand signifies the ability or the willingness to buy a
particular commodity at a given point of time. Demand is also defined elsewhere as a
measure of preferences that is weighted by income.

DEMAND SCHEDULE
The demand schedule shows the quantity of goods that a consumer would be willing
and able to buy at specific prices under the existing circumstances. Some of the more
important factors affecting demand are the price of the good, the price of related
goods, tastes and preferences, income, and consumer expectations.

DETERMINANTS OF DEMAND
Innumerable factors and circumstances could affect a buyer's willingness or ability to
buy a good. Some of the more common factors are:
Good's own price: The basic demand relationship is between the price of a good and
the quantity supplied. Generally the relationship is negative or inverse meaning that
an increase in price will induce a decrease in the quantity demanded. This negative
relationship is embodied in the downward slope of the consumer demand curve. The
assumption of an inverse relationship is reasonable and intuitive. If the price of a new
novel is high, a person might decide to borrow the book from the public library rather
than buy it. Or if the price of a new equipment is high a firm may decide to repair
existing equipment rather than replacing it.

Price of related goods: The principal related goods are complements and substitutes.
A complement is a good that is used with the primary good. Examples include
hotdogs and mustard; beer and pretzels, automobiles and gasoline. Close
complements behave as a single good. If the price of the complement goes up the
quantity demanded of the other good goes down. Mathematically, the variable
representing the complementary good would have a negative coefficient. For
example, Qd = P - Pg where Q is quantity of automobiles demanded, P is the price of
automobiles and Pg is the price of gasoline. The other main categories of related
goods are substitutes. Substitutes are goods that can be used in place of the primary
good. The mathematical relationship between the substitute and the good in question
is negative. If the price of the substitute goes down the demand for the good in
question goes up.
Income: The more money you have the more likely you are to buy a good.
Taste or preferences: The greater the desires to own a good the more likely you are
to buy the good. There is a basic distinction between desire and demand. Desire is a
measure of the willingness to buy a good. Demand is the willingness and ability to
affect one's desires. It is assumed that tastes and preferences are relatively constant.
Consumer expectations about future prices and income: If a consumer believes
that the price of the good will be higher in the future he is more likely to purchase the
good now. If the consumer expects that her income will be higher in the future the
consumer may buy the good now. In other words positive expectations about future
income may encourage present consumption (Demand increases).

DEMAND CURVE
The relationship of price and quantity demanded can be exhibited graphically as the
demand curve. The curve is generally negatively sloped. The curve is two
dimensional and depicts the relationship between two variables only; price and
quantity demanded. All other factors affecting demand are held constant. However,
these factors are part of the demand curve and are present in the intercept. Economics
puts the independent variable on the y-axis and the dependent variable on the x=axis.
Consequently, the graphical presentation is of the inverse demand function = P = f
(Q).

THE LAW OF DEMAND

An important generalization about demand is described by the law of demand. The
law of Demand expresses the functional relationship between price and quantity
demanded. The law of demand or functional relationship between price and quantity
demanded is one of the best known and most important laws of economic theory.
According to the law of demand, other things being equal, if the price of a commodity
falls, the quantity demanded will increase and if the price of a commodity rises, the
quantity demanded will decline. Thus according to the law of demand there is an
inverse relationship between price and quantity demanded, other things remaining the
same. These other things which are assumed to be constant are the tastes and

preferences of the consumer, the income of the consumer, and prices of the related
goods. Law of demand has been defined as follows:
1. The greater the amount to be sold the smaller must be the price at which it is
offered in order that it may find purchasers; in other words, the amount
demanded increases with a fall in price and diminishes with a rise in price.
Prof.Marshall
2. When the price of a good is raised (at the same time that of all other things
are held constant) less of it will be demandedpeople will buy
more at lower price and buy less at higher prices.
Prof.P.A.Samuels
on
Relationship between Price and Demand is inverse but not necessarily
Proportionate. It is very important to note regarding law of demand that it is only a
qualitative statement and not a quantitative statement. This law explains that the
demand of a commodity increases on fall in price and decline on an increase in price
but it does not tell how much demand will increase on a certain fall in the price of a
commodity and vice-versa. Thus, law of demand indicates only the direction of
change in demand but it does not establish any arithmetical relationship between price
and demand.
The law of demand can be illustrated through a demand schedule and through a
demand curve. A demand schedule is presented in Table below. It will be seen from
this demand schedule that when the price of a commodity is Rs.6 per unit, consumer
purchases 10 units of the commodity. When the price of the commodity falls to 5, he
purchases 20 units of the commodity. Similarly, when the price further falls, quantity
demanded by him goes on rising until at price Rs.1, the quantity demanded by him
rises to 60 units.
Table 1
Demand Schedule of an Individual Consumer
Price(Rs.)
Quantity Demanded
6
5
4
3
2
1

10
20
30
40
50
60

We can convert this demand schedule into a demand curve by graphically plotting the
various price-quantity combinations, and this has been done in figure 1, where along
the X-axis, quantity demanded is measured and along the Y-axis, price of the
commodity is measured. Thus, this demand curve is a graphic statement or
presentation of quantities of a good which will be demanded by the consumer at
various possible prices at a given moment of time. The demand curve slopes
downward to the right.

Figure 1

Assumption of Law of Demand

Others things being equal is an important clause of the law of demand. This clause
explains assumptions of on which it is based. These assumptions are the conditions
that should be fulfilled for the application of this law. According to Prof. Mayers, the
assumptions of the law of demand are as follows:
1.
2.
3.
4.
5.
6.

Income of the consumer should remain constant.

There should be no change of habits or tastes of consumers.
There should be no change in the price of related commodities.
No new substitute of the commodity should be developed.
There should be no hope of further change in prices.
The commodity should not be a commodity of prestige.

EXCEPTIONS TO THE LAW OF DEMAND

Law of demand explains that the demand of a commodity increases on a fall in its
price and decreases on an increase in its price. But there are certain circumstances
when this law does not apply. These circumstances are known as the exceptions to this
law:
1. Giffins Paradox- Most important criticism of the law of demand is giffinss
paradox. Giffin was a great statistician of Britain during 19th century.
According to him, when the price of bread increased, low paid workers
purchased more bread and with the fall in the price, the demand for bread
declined. Giffin goods are the inferior goods.
2. Conspicuous Necessities- Another important exception to the law of demand
occurs in such commodities which are necessary for life such as salt, foodgrains, medicines etc. Demand of such commodities is not affected by a
change in their prices because the consumers can neither increase nor decrease

the consumption of such commodities. For e.g., if salt is Rs.2 per kg and the
price of salt falls to Rs.1 per kg quantity of its consumption cannot be
increased or if the price increases to Rs.4 per kg it cannot be decreased.
3. Commodities of Prestige- Law of demand does not apply on the commodities
of prestige also. Demand of such commodities increases even on an increase
in their prices because such commodities are used by very rich people for
whom the price of commodity does not matter. For e.g. the price of luxury
cars.
4. Expectation of further change in Price- Law of demand does not apply
when prices are expected to change further.
5. Ignorance of Consumers- Prof. Benham stated that ignorance of consumers
is also a factor that induces them to purchase more of a commodity at a higher
price. Some of the consumers who feel that high priced goods are better than
low priced one.
Thus it is clear that there are certain exceptions to the law of demand but it does not
mean that it is baseless or not applicable. The fact is that this law is universally
applicable.

ELASTICITY OF DEMAND
Law of demand explains that the demand of a commodity increases on a fall in its
price and decreases on an increase in its price. This law indicates only the direction of
change in the quantity demanded of a commodity in response to a change in its price,
but it does not tell the extent to which the quantity demanded of the commodity will
change in response to a certain change in its price. This information is provided by the
concept of elasticity of demand.
Elasticity of demand is the measurement of change in the quantity demanded of
a commodity in response to a certain change in its price, the term Elasticity of
Demand has been defined by Prof. Marshall as The elasticity of demand in a market
is great or small according to as the amount demanded increases much or little for a
given fall in price and diminishes much or little for a given rise in price.

CONCEPTS OF ELASTICITY OF DEMAND

1. Price elasticity of demand- Price elasticity of demand expresses relationship
between change in the quantity demanded of a commodity and a proportionate
change in its price. While calculating price elasticity of demand, the income of
consumers, their tastes and habits, and prices of all the related commodities
are taken to be constant. Thus, price elasticity of demand is a proportionate
change in the quantity demanded of a commodity in response to a certain
change in its price. According to Mrs. Joan Robinson, Elasticity of demand is
the proportionate change in quantity demanded in response to a small change
in price, divided by the proportionate change in price.
Price elasticity of demand = Proportionate change in quantity demanded
Proportionate change in price

2. Income Elasticity of Demand- Income Elasticity of Demand measures changes

in the quantity demanded of a commodity in relation to the changes in income of
consumers. It can be defined as proportionate change in the quantity demanded of a
commodity in relation to a proportionate change in income of a consumer. It can be
defined as proportionate change in the quantity demanded of a commodity in relation
to a proportionate change in the income of the consumer. It can be expressed as under:
Income elasticity of demand = Proportionate change in demanded
Proportionate change in Income

3. Cross Elasticity of Demand- Cross Elasticity of Demand measures a change in the

quantity demanded of a particular commodity in response to a change in the price of
some related commodities. It can be defined as proportionate change in the demand of
commodity X in response of a proportionate change in the price of a related
commodity Y. There are two forms of Cross elasticity of demand: Cross elasticity in
respect of complementary goods and Cross elasticity of demand in respect of
substitute goods.
Cross elasticity of demand = Proportionate change in the demand of commodity X
Proportionate change in the price of commodity Y

TYPES OF ELASTICITY OF DEMAND

Demand of certain commodities is more elastic (a little change in the price of such
commodities brings more change in their demand). While the demand of some
commodities is less elastic (change in the demand of such commodities is less in
proportion to the change in their price). Since the elasticity of demand of different
commodities is different, we can study the elasticity of demand by dividing into five
types. It is to remember in this regard that by the word elasticity of demand here, we
mean only the price elasticity of demand.
1. Perfectly Elastic Demand- When demand of a commodity increases or decreases
to any extent without any change or only upon a small change in its price, such
demand is called perfectly elastic demand.
2. Highly Elastic Demand- When proportionate change in the demand of a
commodity is more than the proportionate change in its price, it is called highly
elastic demand. For e.g. if there is 2% decrease in the price of a commodity and its
demand increase by 10%, it will be called highly elastic demand. Demand of the
goods of the comforts is generally found to be elastic.
3. Elastic Demand- When proportionate change in the demand of a commodity and
proportionate change in its price are equal, it is said to be elastic demand. For e.g. if
there is 10% decrease in the price of a commodity and its demand increase by 10%, it
will be called highly elastic demand.

4. Less Elastic Demand or Inelastic Demand- When proportionate change in the

demand of a commodity is less than proportionate change in its price, it is said to be
less elastic demand, or inelastic demand.
5. Perfectly Inelastic Demand- When the demand of a commodity does not change
at all irrespective of any change in its price, it is said to be perfectly inelastic demand.

CONSUMER SOVEREIGNTY
The term "consumer sovereignty" was coined by William Hutt who firstly used it in
his 1936 book "Economists and the Public. Consumer sovereignty is a term which is
used in economics to refer to the rule or sovereignty of consumers in markets as to
production of goods. It is the power of consumers to decide what gets produced.
People use the this term to describe the consumer as the "king," or ruler, of the
market, the one who determines what products will be produced. Also, this term
denotes the way in which a consumer ideologically chooses to buy a good or service.
Consumer sovereignty means that buyers ultimately determine which goods and
services remain in production. While businesses can produce and attempt to sell
whatever goods they choose, if the goods fail to satisfy the wants and needs,
consumers decide not to buy. If the consumers do not buy, the businesses do not sell
and the goods are not produced.

IMPORTANCE OF CONSUMERS SOVEREIGNTY

Concept of consumers sovereignty establishes a consumer as a king, a master and a
sovereign in a capitalist economy. Importance of this concept can be explained as
under:
1. Producers have to study and understand the wants, tastes, habits and
preferences of the consumers.
2. Producers have to produce only those goods and services which are demanded
by consumers.
3. Goods and services are produced in the quantity in which they are demanded.
4. Size, colour, packing etc. are decided keeping in view the tastes and
preferences of the consumer.
5. Goods and services are distributed in the manner, most convenient to
consumers.

LIMITATIONS OF CONSUMER SOVEREIGNTY

Consumers are the sovereign in the whole economy because if there are no
consumers, there will be no production, and hence the economy will fully collapse.
But there are certain limitations, due to which this concept does not hold true. They
are as follows:

1. Ignorance of Market- Sometime the consumers are not aware of the goods,
services and sellers available in the market. Due to this reason, they cannot
make the best buy of their money.
2. Limited Income of the Consumers- Wants of every consumer are unlimited
while the resources available with him to satisfy these wants are limited and
that too have alternative uses. He cannot satisfy all his wants. So he cannot
behave freely.
3. Habits and Social Customs of Consumers- Due to habits and social
customs, consumers have to buy certain goods and services which do not
provide them as much utility as they should get.
4. Limited Production Capacity and Technique- Every economy have a
limited production capacity and technique. Due to this limitation, consumers
cannot get everything, they like to get.
5. Effect of Advertisement- It is the time of advertisement and salesmanship.
Advertisement and salesmanship have entered into our daily life to the extent
that normally the consumers buy what the producer want to sell to them. It
also curtails their sovereignty.
Conclusion: Theoretically, a consumer is said to be the king, the master and the
sovereign of a capitalist economy. Under such an economy, a consumer is supposed to
regulate and direct all economic activity. Practically the situations are quite different.
Consumers sovereignty has been curtailed due to a no. of causes. To conclude, it can
be said, the consumer is not a monarch, he is supposed to be. However, he is a
constitutional monarch, who reigns but does not rule.

MEANING OF UTILITY
Utility is the wants satisfying power of a means commodity. It is also defined as
property of the commodity which satisfies the wants of the consumers.
Thus according to Prof.Edward In economics, utility means the satisfaction or
pleasure or benefit derived by a person out of the consumption of wealth or assets.
An important question regarding utility is-whether it can be measured or not? There is
a great controversy among economists on this question. Some economists are of the
view that utility is a measureable concept while other of the view that utility is a
psychological concept and it cannot be measured. Thus there are two approaches in
this regard-Cardinal and Ordinal approach. The term Cardinal and Ordinal have
been borrowed from mathematics.
The numbers 1,2,3 etc are cardinal no. According to the cardinal system, the utility of
a commodity is measured in units and that utility can be added, subtracted and
compared. For eg., if the utility of one apple is 10 units, of banana 20 units and of
orange 40 units, the utility of banana is double that of apple and of orange four times
the apple and twice of the banana.
The Ordinal no. 1st, 2nd, 3rd etc. which may stand 1,2,4,6 etc. They tell us that the
consumer prefers the first to the second & the third to the second and first and so on.
But they cannot tell us by how much he prefers one to the other.

The entire Marshallian utility analysis is based on the cardinal measurement of utility.
According to Hicks, utility cannot be measured cardinally because utility which a
commodity possesses is subjective and psychological. He, therefore, rejects the
quantitative measurement of utility and measures utility ordinally in terms of IC
techniques.