Cardinal Utility

Cardinal utility is that utility which can be expressed in quantitative terms i.e., utility can be measured in quantitative terms. A measure of utility, or satisfaction derived from the consumption of goods and services that can be measured using an absolute scale. Cardinal utility exists if the utility derived from consumption is measurable in the same way that other physical characteristics–height and weight–are measured using a scale that is comparable between people.

Prof. Fisher has used the term, “Util”, as a unit for the measurement of utility.

A util has a fixed size, making comparisons based on ratios of utils possible.

Analysis of cardinal utility is based on:

  • The law of diminishing marginal utility.
  • The law of Equi- marginal utility.

Assumptions: The cardinal utility approach to consumer analysis makes the following assumptions:-

  1. RATIONALITY – it is assumed that the consumer is a rational being in the sense that he satisfies his wants in the order of their preferences, that is, he or she buys the commodity first which yields the higher utility and that least which gives the least
  2. LIMITED MONEY INCOME – The consumer has a limited money income to spend on the goods and services he or she chooses to consume. Limitedness of income, along with utility maximization objective makes the choice between goods inevitable.
  3. MAXIMIZATION OF SATISFACTION – Every rational consumer intends to maximize his/her satisfaction from his/her given money income.
  4. UTILITY IS CARDINALLY MEASURABLE – The cardinalists have assumed that the commodities that the utility is cardinally measurable and that utility of one unit of a commodity equals the money which a consumer is prepared to pay for it or 1util = 1unit of money.
  5. CONSTANT MARGINAL UTILITY OF MONEY – The cardinal utility approach assumes that the marginal utility of money remains constant whatever the level of a consumer’s income. This assumption is necessary to keep the scale of measuring rod of utility fixed. It is important to recall in this regard that cardinalists used ‘money’ as the measure of utility.
  6. UTILITY IS ADDITIVE – Cardinalists assumed not only that utility is cardinally measurable bit also that utility derived from various goods and services consumed by a consumer can be added together to obtain the total utility. In other words, the consumer has a utility function which may be expressed as:

                                        U= f(X1, X2, X3 …Xn)

      Where X1, X2 …X3 denote total quantities of the various goods consumed.

Given the utility function, total utility obtained from n items can be expressed as:

Un = U1(X1) +U2(X2) + U3(X3) + ……+ Un (Xn) it is the utility function which the consumer aims to maximize.

  1. INDEPENDENT UTILITIES:-It is assumed that the utility which a consumer obtains from a good does not depend upon the quantity consumed of other goods; it depends upon the quantity purchased of that good alone.
  2. INTROSPECTION-Introspection is the ability of observer to reconstruct events which go in the minds of another person with the help of self observation. That is by looking into ourselves we see inside the heads of other individuals.

 

TOTAL UTILITY:-

It is the sum of utilities derived by a consumer from various units of goods and services he consumes. Suppose a consumer consumes four units of a commodity, X, at a time and derives utility as U1,U2,U3,U4. His total utility (TUx) from commodity X can be measured as follows.

                                 TUx = U1 + U2 + U3 + U4

If ‘n’ number of commodities he consumes, then his total utility will be-

                                  TUn = Ux + Uy + Uz

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By Hassham

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