Consumption
2.3. CARDINAL UTILITY APPROACH
According to the cardinal analysis, the utility is measured is terms of 'utils' or units. According to Marshall, utility of a commodity is quantifiable, he assumed that if a consumer brought a loaf of bread, it gave 15 units of satisfaction. Thus when satisfaction is measured in mathematical terms it is referred to as cardinal utility.
There are two laws which are related to the cardinal principle:
1. The law of Diminishing Marginal utility.
2. The law of equi-marginal utility.
The Law of Diminishing Marginal Utility
The principle behind the law of diminishing marginal utility is that, as an individual consumer consumes more and more of a commodity, he desire for the commodity gradually decreases and he consumes less of that commodity, as he is indifferent to it. This tendency of the consumer is reflected in every commodity the consumer consumes.
The law states that “Other things being equal, as the quantity of commodity consumed or acquired by the consumer increases, the marginal utility of the commodity tends to diminish”. As a person purchases more and more units of a commodity, its marginal utility decreases. Boulding defines it as "When a consumer increases the consumption of any one commodity, keeping constant the consumption of all other commodities, the marginal utility of the variable commodity must eventually decline". Marshall defines it as, "The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has". For instance if person Z is consuming bread. The first slice of bread gives him 30 units of utility. The second one gives 25 units of utility, the third one 16 units of utility. The fourth one gives him 12 units of utility. And 5th slice gives him only 5 units of utility. Thus it is seen from the above example, that as the individual consumes more and more of a commodity his satisfaction gradually diminishes.
Utility Schedule
Units of commodity Total Utility Marginal Utility
1 20 20
2 37 7
3 49 12
4 58 9
5 64 6
6 64 0
7 62 –2
The law of diminishing marginal utility can be explained through a schedule. From the schedule, it is seen that as the consumer goes on consuming more and more of units his additional satisfaction gradually diminishes. When the consumer consumes
the first unit, his total utility and marginal utility remain at 20 units. When he consumes the second unit, his total utility increases to 37 units, marginal utility decreases to 17 units, and when he consumes the third unit, his marginal further more decreases to 12 units. As the consumer goes on buying more and more of the commodity, his additional or marginal utility gradually diminishes, and when he consumes the sixth unit of the commodity, his marginal utility becomes zero. Though the total utility seems to increase, it increases at a diminishing rate. If the consumer continues to consume his marginal utility becomes negative as seen in the schedule. When he consumes the seventh unit, he obtains a negative marginal utility of –2 units.
The law of diminishing marginal utility can also be explained through a figure. On the Y axis utility of the units is measured.
And on the X axis units of the commodity is measured. With the data available from the schedule, the total utility and marginal utility at various levels of consumption are pointed. As shown in the figure, the total utility curve ascends, reaches the maximum point and then begins to decline. Marginal utility declines gradually reaches a zero level and then a negative level. The point where
the marginal utility curve touches the X axis is known as the point of satiety, where the total utility is at its maximum. After this point even if the consumer desires to buy the commodity he will be only dissatisfied with the commodity.
Assumptions
● The successive units of the commodities consumed should be identical and homogenous in all respects with out any difference, or the consumer would obtain more satisfaction by consuming the additional commodity than get less satisfied.
● The consumption process should be continuous, in order to measure its utility. Units of the commodity should be used continuously, for instance the first cup of coffee in the morning and next cup in the evening will not result in diminishing marginal utility.
● The unit consumed should be of the standard unit. For instance, if the consumer is drinking water, it should not be spoonsful but glass ful .
● The consumer is expected to be rational person who likes to measure his utility.
● The tastes of the consumer is assumed to be constant.
● It is also assumed that utility of the consumer is numerically measured. He is capable of mentioning the quantum of utility derived from each additional unit consumed by him.
Importance of the Law
The law of diminishing marginal utility has provided the foundation for various laws of consumption. The law of demand is also the outcome of the law of diminishing marginal utility.
According to the law of demand, large quantities are purchased at less price and vice versa. This is because when more units are purchased, its marginal utility to the consumer becomes less and less and so he gives lesser importance to additional units of the commodity and thus buy additional units only at a lower price.
A rational consumer seeks to maximize his level of satisfaction from the commodities he buys. When he is confronted with combination of many goods and alternatives. He would rank them
according to the different levels of satisfaction in order to decide.
Such a conceptual ordering of different goods and their combinations in a set order of preferences is termed as the scale of preferences.
Here the economists wanted to find whether a particular combination of goods gave utility to the consumer as another combination of goods. It is thus seen that the concept of scale of preference does not attempt to measure utility at all. It is only a device by which the utilities of commodities are compared and chosen. The scale of preference is given a practical shape through the indifference curve technique. The law also explains the paradox of value-in- use and value-in-exchange. Diamonds have great value in exchange as they are scarce in supply and priced high, where as water is in abundant supply and its marginal utility is very low. Therefore it commands less though its utility is high. Thus water has great value in use but no value in exchange. Diamonds have great value in exchange, though they are less useful than water.