Post on 18-Aug-2015
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.