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Theoretical Evidence That the Hicksian Model Attempts to Enhance the Consumer Theory - Essay Example

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This paper "Theoretical Evidence That the Hicksian Model Attempts to Enhance the Consumer Theory" focuses on the consumer theory which is one of the centrepieces of the neoclassical branch of microeconomics. Neoclassical consumer theory is the foundation on which modern economics has its basis. …
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Theoretical Evidence That the Hicksian Model Attempts to Enhance the Consumer Theory
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Download file to see previous pages The principles and models that arise from neo-classical consumer theory are the basis for modern day economic analysis. Although consumer theory is not under unanimous acceptance, modern economists that try to criticize the theory lack enough evidence. The critiques against neoclassical consumer theory lack in evidence and fact and most of those critiques misrepresent the neoclassical approach to economics. Several assumptions are necessary for the neoclassical consumer theory to work efficiently. The assumptions made in neoclassical consumer theory double as its differences with the Austrian approach to economics. The first assumption in neoclassical consumer theory is that every individual is only a consumer. This means that every individual is a purchaser of consumption goods and services. The consumer theory ignores the fact the individuals under analysis could be producers in the market, but it does not deny it. In this study, the various models applied in neoclassical consumer theory will be under analysis, in order to gain a better understanding on the best models to use in different analytical situations (Hicks & Allen, 1934).
Marshall’s model of consumer behaviour assumes that the consumer has a perfect knowledge of the market. The model also assumes the consumer is a rational buyer who knows his or her desires and knows the best way of satisfying them. According to this model, buyers are bound to spend on the goods that satisfy their desires. The satisfaction of these desires is dependent on the relative price and the taste of the buyers. In his model, Alfred Marshall also states that the price and output of any given good are dependent on demand and supply (Marshall, 1961).
The demand and supply curves cut each other like scissors and their point of intersection is the equilibrium. Marshall was the first economist to develop the standard supply and demand curves and he proved the relationship between price and quantity in relation to supply and demand and the law of marginal utility.   ...Download file to see next pagesRead More
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