Cardinal UtilityTheory

Presented By:Deepali (07)

Assumptions of Utility

Rational consumer Cardinal utility Divisibility Independent utility Diminishing Marginal Utility

Concepts of Utility

On the basis of the consumption of a commodity,

there are two concepts of utility:

1. Total Utility

2. Marginal Utility

Total Utility

The aggregate of utilities obtained from the

consumption of different units of a commodity

is called total utility. It is expressed as:

TUx= f(Qx)

(TUx = Total utility of ‘x’ is a function (f) of quantity of commodity ‘x’.)

Marginal utility

Marginal utility is the addition made to total

utility by consuming one more unit of

Commodity.

Marginal utility can be measured as:

MU= change in total utility/ change in the quantity of commodity

Marginal utility can be:

Positive, negative or zero.

Laws of Utility Analysis

Utility analysis has two main laws:

1. Law of Diminishing Marginal Utility

2. Law of Equi-Marginal Utility

Law of Diminishing Marginal Utility

It states that, other things being equal, the marginal

utility of a good diminishes as more it is consumed in

a given time period .

For Example

Assumptions

Utility can be measured in the cardinal no. System. Utility of one commodity is independent of the

other. Marginal utility of money remains constant. Consumer is a rational person. It means that he

wants to maximise his satisfaction.

Exceptions

Curious and rare things Drunkards Initial units Good book or poem

Importance of the law

1. Basis of the law of consumption

2. Variety in production and consumption

3. Price determination

4. Advantage to the consumer

Criticism of this law

1. Cardinal measurement of utility is not possible.

2. Marginal utility of money is not constant.

3. Every commodity is not an independent commodity.

4. Unrealistic assumption.

Law of Equi-Marginal Utility

A consumer gets maximum satisfaction when

the ratio of marginal utilities of all commodities

and their price is equal.

Importance of this law

1. Consumption

2. Production

3. Exchange

4. Distribution

5. Optimum distribution of commodities

Criticism of the law

1. Consumers are not fully rational.

2. Shortage of goods.

3. Indivisibility of goods.

4. Constant income and price.

5. Cardinal measurement of utility is not possible.

6. Change in the marginal utility of money.

Criticism of Cardinal Utility Analysis

Utility is subjective. Every commodity is not an independent

commodity. Marginal utility of money does not remain

constant. Marginal utility cannot be estimated for all

commodities. Cardinal measurement of utility is not possible.