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Cardinal Utility Meaning
Cardinal utility: A consumer demand arises from the level of satisfaction received from a particular commodity (utility). The utility refers to the level of want-satisfaction gained from consumption. As the need or desire for the commodity gets more substantial, the utility level derived from the thing also increases. The utility is a subjective matter, as it will differ from person to person.
For example, if someone likes sweets, they will get higher utility after consuming chocolate compared to someone who does not like sweets—also, a utility that a person receives from the commodity with the change in place and time. For example, in the air conditioner case, the utility will depend upon whether the person is in Canada of UAE (place) or whether it is summer or winter (time).
Definition of Cardinal Utility:
Definition: The Cardinal Utility approach is given by neo-classical economists, who believed that customers could express their level of satisfaction in utility. It is measurable in cardinal or quantitative numbers, such as 1,2,3, and so on.
Meaning of Cardinal Utility:
After acquiring any goods and services, a consumer’s satisfaction can be measurable and expressed in quantitative numbers is called a cardinal utility.
The Cardinal Utility states that if people can express the consumption of certain goods in a quantitative number, for example, consider X wearing a shirt, which gives him 5,000 units of utility. A t-shirt would provide 8,000 units.
Measures of Utility
Cardinal utility only states about expressing the consumption in measurable terms. Measures of utility tell about the level of consumption, and it clarifies the equation.
Total utility (TU) refers to the total satisfaction derived from consuming a commodity’s fixed quantity.
More quantity of a commodity provides more satisfaction to the consumer. TU derives from the total quantity of the commodity consumed. Whereas, TUn derives from the consuming n quantity of a particular thing.
Marginal Utility (MU) refers to the change in total utility because of the consumption of one additional unit of a commodity.
For example, suppose 10 ice cream gives us 50 units of total utility, and 11 ice cream gives us 60 units of total utility. Hence, the 11th ice cream consumption has caused the total utility to increase by 10 units (60 units – 50 units). Therefore, the marginal utility of the 11th ice cream is 5 units.
MU11 = TU11 – TU10 = 60 – 50 =105
The equation to find MU of the nth unit is ‘MUn = TUn – TUn-1’, where n referred to the nth unit of the commodity.
Relation between total utility and marginal utility is equated in the following way:
TUn = MU1 + MU2 + … + MUn-1 + MUn
Therefore, TU derived from the consumption of n units of ice cream is a total of MU of first ice cream, MU of second ice cream till the n th unit.
Marginal Utility Example with Graph
To understand the concept of cardinal utility more clearly, here is the example of how the total utility and marginal utility can is calculated and their representation on the graph:
In the concept of cardinal utility, the law of diminishing marginal utility states how the consumption and utility work in humans.
Law Of Diminishing Marginal Utility
The Law of Diminishing Marginal Utility states that marginal utility from consuming each additional unit of a commodity declines as its consumption increases while keeping other commodities constant.
When TU is constant, MU becomes zero. In the example, TU does not change at 5th unit of consumption and therefore MU 5= 0. After that, TU starts falling, and MU becomes negative.
Law Of Diminishing Marginal Utility- Graphical Representation
Causes of Diminishing Marginal Utility:
Causes of occurring diminishing marginal utility, why the cardinal utility can be expressed in negative as well:
1. Satisfaction of a Particular Commodity
Although the wants of humans are unlimited, a particular desire for a commodity is limited. Therefore, it is possible to satisfy the limited wants of humans. With the increasing number of items, a person’s desire to consume more commodities becomes less. So, the marginal utility derived from each successive unit becomes gradually smaller. Hence, consuming too many units of a commodity brings complete satisfaction to humans.
The law’s validity is established through introspection (i.e., examining one’s thoughts or mental reactions). The classical economists used to look into their minds for their psychological response to the extra consumption of a particular thing (say, an apple, an ice-cream, chocolate, etc.) and tested the truth of the law.
3. Less Important Uses of Additional Quantities
Also, diminishes MU can cause because of the consumption of several units capable of alternative uses. Consumption of most crucial use can take one unit, and additional units can be used to take from alternative products to less essential uses.
Assumptions of Law of diminishing marginal utility
The Law of cardinal utility and Diminishing Marginal Utility is based on the following assumptions:
- A consumer can express and measure their utility in numbers (utils). Plus, units of the commodity is defined correctly.
- The maximum price on which the consumer is ready to pay for the commodity depends upon its marginal utility to him.
- Consumer taste and preference remain constants during the period of purchases.
- The amount of initial consumption needs to sufficient to give consumer satisfaction.
Drawbacks of Law of diminishing marginal utility
The Law of diminishing marginal utility has some drawbacks. This law might not be applicable in certain circumstances. In case of exceptional cases, MU might increase for some time, where cardinal utility might work. Six important exceptional cases to the law are:
Change of Taste and Preferences
In case of a change in consumer tastes and preferences, he can like a commodity more, so the MU of any commodity price rises. For example, a person initially might not have any interest in eating pizza. But after eating one pizza, he may get a better taste for pizza and may get better satisfaction from the 2nd or the 3rd one.
Inadequate Initial Consumption
If the initial quantity of a commodity is minimal, a person might not get satisfaction. In this case, a person will have a high level of satisfaction in 2nd or 3rd consumption. For example, a glass of water might not fulfill the person’s thirst, but the 2nd or 3rd glass will do.
Emotional or Fancy Buying
A thing’s marginal utility does not diminish when a buyer purchases it in a larger quantity out of sheer emotion or fancy. An example is the artwork of a known painter or a rare book of a dead author.
Miser’s Collections or Hobby Collections
A miser (person who likes collecting money) will get more and more satisfaction from the additional money. Similarly, a person who likes collecting things, e.g., stamps, coins, works of art, etc…as will also get more and more satisfaction with additional units as hobby-collections satisfaction increases gradually.
Consumption at Different Time Periods
If the consumption of a particular commodity of different units and at different times, MU from additional units is not likely to decrease. For example, consumption of the same food in three other meals of the day, MU may not diminish.
Stock with Other Persons
In many cases, utility depends upon the stock available to others; let’s say in a locality, one person has more than one car, the other car utility will not diminish.
Here was the topic of cardinal utility and all the other related, which comes under cardinal utility.