Utility-Cardinal and
Ordinal Approach
Reena Kumari
Assistant Professor
Department of Humanities and Social Sciences
MNNIT, Allahabad
Lecture plan
Concept of utility.
• Jevon (1835 -1882) was the first
economist who introduces the concept of
utility in economics.
• Utility is defined as:
"The power of a commodity or
service to satisfy human want".
• Utility is thus, the satisfaction which is
derived by the consumer by consuming
the goods.
• Marshall was the first economist who
introduces the concept of marginal utility
in economic analysis.
• Marshall has given the cardinal approach
of utility analysis.
1. Consumer is rational: He wants to maximize his
satisfaction (total utility) from he buys.
2. Cardinal measurability of utility
Assumptions
of utility
3. Marginal utility of money is constant at all levels of
income of the consumer
4. Diminishing marginal utility
5. Utility is additive-TU=Ux+Uy+Uz+………Un
Characteristics of utility
Usefulness
Satisfaction
Pleasure
Subjective
Relative
Abstract
Utility does not
mean that it is
useful-the
consumption of
that good may be
‘useful’ or
‘harmful’ e.g wine
Utility is the
quality or power
of a commodity to
satisfy human
wants, whereas
satisfaction is the
result of utility
Utility is free
from pain or
pleasureinjection
possesses
utility for a
patient
Subjective and
psychological
concept-differs
from person to
person
Different times
or at different
places or for
different
persons
Cannot be seen
with eyes, or
touched or felt
with hands
Utility measures
• Utility-The attributes of a product or service that make it able to satisfy human wants or needs.
We measure utility in terms of ‘utils’
A hypothetical measure
Types of utility
Marginal Utility (MU)
Total Utility (TU)
TU and MU
• Total Utility (TU) implies overall level of satisfaction derived from a good by a consumer.
• Suppose a consumer three units of a chocolate A and derives utility from them as U1, U2 and U3. In
such a case, TU from chocolate A would be:
• UA = U1 + U2 + U3
• The total utility of two apples is 35 = (20 + 15) utils, of three apples 45 = (20 + 15 + 10) utils, and of
four apples 50=(20+15+10+5) utils.
• Marginal Utility (MU) can be defined as additional utility gained from the consumption of an
additional unit of a good.
• MUn = TUn – TUn-1
• The total utility of the two apples is 35 utils. When the consumer consumes the third apple, the total
utility becomes 45 utils. Thus, marginal utility of the third apple is 10 utils (45—35).
Law of
diminishing
marginal utility
• Gossen's First Law is known as
"law" of diminishing marginal
utility
• The Law of Diminishing Marginal
Utility states that the additional
utility gained from an increase in
consumption decreases with
each subsequent increase in the
level of consumption.
Assumptions of the law of MU
Various units of goods are homogeneous i.e.,
identical in size shape, quality, quantity
The units of consumption are of reasonable
size
No time lag in consumption
Consumer is rational and he aims at maximum
of satisfaction
Taste, preferences and fashion remains
unchanged
No change in the state of mind of consumer
Exemptions of the law
Law of Equi-marginal Utility
• The idea of equi-marginal principle was first mentioned by H.H.Gossen
(1810-1858).
• It is called Gossen's second Law.
• Alfred Marshall made significant refinements of this law in his 'Principles of
Economics’ (1890).
• This law explains how the consumer spends his limited income on various
commodities to get maximum satisfaction.
• The law of equi-marginal utility is also known as the law of substitution or
the law of maximum satisfaction or the principle of proportionality
between prices and marginal utility.
• Prof. Marshall-If a person has a thing which can be put to several uses, he
will distribute it among these uses in such a way that it has the same
marginal utility in all'.
Assumptions
1. The consumer is rational, so he wants to get maximum satisfaction.
2. The utility of each commodity is measurable.
3. The marginal utility of money remains constant.
4. The income of the consumer is given.
5. The prices of the commodities are given.
6. The law is based on the law of diminishing marginal utility.
Law of equi marginal utility
• According to the law of equi-marginal
utility, the consumer will be in equilibrium
at the point where the utility derived
from the last rupee spent on each is
equal.
• Ex-prices of goods X and Y be Rs. 2 and
Rs. 3 respectively.
• Suppose a consumer has money income
of Rs. 24 to spend on the two goods.
• MUx / Px is equal to 5 utils when the
consumer purchases 6 units of good X
and MUy / Py is equal to 5 utils when he
buys 4 units of good Y.
• Therefore, consumer will be in
equilibrium when he is buying 6 units of
good X and 4 units of good 7and will be
spending (Rs. 2 x 6 + Rs. 3 x 4 ) = Rs. 24
Marginal Utility of X and Y
Marginal Utility of money expenditure
Consumer equilibrium
under cardinal approach
• For consumer equilibrium two
conditions must satisfy• 1. MU = Price
• 2. MU must be diminishing
• MUx / Px = MUy / Py = …. = MUm
Criticism of cardinal utility approach
• Unrealistic Assumptions-Marshall assumed that utility derived from a
commodity can be measured in cardinal numbers.
• MU of Money Can Never be Constant: Marginal utility of money also
diminishes when stock of money rises.
• No Formal Distinction between Income and Substitution Effect:
• Because of the constancy in the marginal utility of money, Marshall
could not distinguish between income effect and substitution effect
of a price change.
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