Cardinal Utility Analysis/Approach:
Definition and Explanation:
Human wants are unlimited and they are of different intensity. The means at the
disposal of a man are not only scarce but they have alternative uses. As a
result of scarcity of recourses, the consumer cannot satisfy all his wants. He
has to choose as to which want is to be satisfied first and which afterward if
the recourses permit. The consumer is confronted in making a choice.
For example, a man is thirsty. He goes to the market and satisfy his
thirst by purchasing coca cola instead of tea. We are here to examine the
economic forces which make him purchase a particular commodity. The answer is
simple. The consumer buys a commodity because it gives him satisfaction. In
technical term, a consumer purchases a commodity because it has utility for him.
We now examine the tools which are used in the analyzes of consumer behavior.
Concept of Utility:
Jevon
(1835 -1882) was the first economist who introduces the concept of utility in
economics. According to him:
"Utility is the basis on which the demand of a
individual for a commodity depends upon".
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.
For
example, cloth has a utility for us because we can wear it. Pen has a utility
who can write with it. The utility is subjective in nature. It differs
from person to person. The utility of a bottle of wine is zero for a person who
is non drinker while it has a very high utility for a drinker.
Here it may
be noted that the term ‘utility’ may not be confused with pleasure or unfulness
which a commodity gives to an individual. Utility is a subjective satisfaction
which consumer gets from consuming any good or service.
For
example, poison is injurious to health but it gives subjective satisfaction
to a person who wishes to die. We can say that utility is value neutral.
Assumptions of Cardinal
Utility Analysis:
The main
assumption or premises on which the cardinal utility analysis rests are as
under.
(i)
Rationality. The consumer is rational. He seeks to maximize satisfaction
from the limited income which is at his disposal.
(ii)
Utility is cardinally measurable. The utility can be measured in
cardinal numbers such as 1, 3, 10, 15, etc. The utility is expressed in
imaginary cardinal numbers tells us a great deal about the preference of the
consumer for a good.
(iii)
Marginal utility of money remains constant. Another important premise of
cardinal utility of money spent on the purchase of a good or service should
remain constant.
(iv)
Diminishing marginal utility. It is also assumed that the marginal
utility obtained from the consumption of a good diminishes continuously as
its consumption is increased.
(v)
Independent utilities. According to the Cardinalist school, the utility
which is derived from the consumption of a good is a function of the
quantity of that good alone. If does not depend at all upon the quantity
consumed of other goods. The goods, we can say, possess independent
utilities and are additive.
(vi)
Introspection method. The Cardinalist school assumes that the behavior
of marginal utility in the mind of another person can be judged with the
help of self observation. For example, I know that as I purchase more and
more of a good, the less utility I derived from the additional units of it.
By applying the same principle, I can read other people mind and say with
confidence that marginal utility of a good diminishes as they have more
units of it.
Criticism:
Pareto, an
Italian Economist, severely criticized the concept of cardinal utility. He
stated that utility is neither quantifiable nor addible. It can, however be
compared. He suggested that the concept of utility should be replaced by the
scale of preference. Hicks and Allen, following the footsteps of Pareto,
introduced the technique of indifference curves. The cardinal utility approach
is thus replaced by ordinal utility function.
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