Just started reading chapter 4 of the CB2 textbook, which discusses marginal utility theory. It seems that utility theory assumes that consumers have perfect information and foresight regarding the benefits of potential purchases. For example, if I was in the market for a 3d printer (and I don't know much about 3d printers) then I wouldn't know whether spending an extra £100 on one would actually offer me much benefit over a cheaper option. Does utility theory assume that all consumers understand the differences between alternative products in perfect detail and that they have perfect foresight of how much benefit they will receive for choosing one option over another? Assuming that utility theory assumes perfect foresight and understanding of products (which is very far from true in reality), I guess it has little real-world use?
I think one of the assumptions behind the theory is that an individual can rank any number of options based on the utility of that option (i.e. its value, worth, satisfaction) to that individual. So a consumer would know if he preferred a certain printer more than another (be it due to the features, brand, or even just perceiving that something more expensive is 'better' in that person's mind) or more than not having a printer at all. And the consumer would know if getting an additional unit of a certain printer would increase, decrease or have no impact on his utility.
Hi This is an interesting discussion. Thanks for posting. I note you’ve just started reading chapter 4. Some of your specific points actually get picked up in chapter 5, which you’ll no doubt get to soon. Marginal utility theory does generally assume that consumers are rational – i.e. they weigh up the costs and benefits to them of each unit of a good purchased. I’m not sure that necessarily requires perfect information and foresight, but it does imply that they have the ability to make such rational decisions. Taking your 3D printing example, you may not know much about 3D printers. But, you could do some research. A little time on an internet search engine, reading reviews or speaking to more knowledgeable contacts might help you make the decision as to which one to buy (or whether to buy at all), and hence to make a rational decision. In theory, you could even build in the costs of doing such research (which would take some time and effort, hence perhaps impacting your utility) into such decision making. Notwithstanding the above, yes there are limitations to models like marginal utility models. That doesn’t mean, however, that they necessarily have little real-World use. All economic models are simplifications of a very complex reality. Economists need to simplify that complex reality to be able to build some form of functional model. While not necessarily perfect, it can give a starting point for understanding economic behaviour which can then be studied and refined as appropriate. If we assume that a consumer aims to maximise their utility, a model like this can still help us understand the decisions people might make, based on maximising their expected utility from purchases / actions. Even if the reality then turns out to be different to their expectations. As you work through the rest of the material in chapter 4, similar discussion pops up through the textbook about some of the other models or topics discussed, such as allowing for the cost and timing of benefits in section 4.2, and an alternative approach called indifference analysis in 4.3. All have their limitations, which are discussed, but all also have their uses. Some of your specific points though are picked up in Chapter 5. In section 5.1, there is a section specifically on “The Problem of Imperfect Information” which picks up some of your discussion points (giving the example of buying a new computer, and not knowing in advance whether it will be reliable or will break down and need fixing etc). Section 5.2 is then all about behavioural economics, which integrates some insights from psychology into more traditional economic theory in an attempt to improve its ability to explain and predict human behaviour. One of the points it specifically then discusses in that section is “bounded rationality” – where consumers might try to maximise utility but may not be able to find or understand the information in order to do so fully – exactly the kind of limitation you describe. So I suggest having those thoughts in mind as you read those sections. Hope that helps.
