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Introduction:

Theory of cardinal utility analysis approach is the earliest theory of demand which describes consumer’s behavior or demand for a specific commodity and then attains maximum satisfaction from it.

Explanation with Example:

Human wants are unlimited and they have different intensities. This means, at the disposal of a man not only scarce but they have alternative uses. As a result of scarcity of resources, the consumer cannot satisfy all his wants. He has to choose as to which want is to be satisfied first and which afterwards, if the resources 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 force which make him to 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 to analyze the consumer behavior.

Concept and Definition 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 an 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.

Explanation of the Utility with Example:

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 has neutral value.

Assumptions of Cardinal Utility Analysis:

The main assumption or premises on which the cardinal utility analysis (theory or approach) 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.