Utility Analysis; The Cardinal Approach or Utility Analysis to the theory of consumer behavior is based upon the concept of utility. This article is to explain Utility Analysis Meaning, Definition, Assumptions, Features, and Concept. It assumes that utility is capable of measurement. It can add, subtract, multiply, and so on. Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumer’s demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded of a product.
Utility Analysis or Cardinal Approach; Meaning, Definition, Assumptions, Features, and Concept.
Recently, cardinal utility approach to the theory of demand has been subjected to severe criticisms and as a result, some alternative theories, namely, Indifference Curve Analysis, Samuelson’s Revealed Preference Theory, and Hicks’ Logical Weak Ordering Theory have been propounded.
According to this approach, the utility can be measured in cardinal numbers, like 1,2,3,4, etc. Fisher has used the term “Util” as a measure of utility. Thus in terms of cardinal approach, it can be said that one gets from a cup of tea 5 utils, from a cup of coffee 10 utils, and a Rasgulla 15 utils worth of utility.
Meaning and definition of Utility Analysis:
The term utility in Economics is used to denote that quality in a good or service by which our wants are satisfied. In, other words utility is defined as the want satisfying power of a commodity.
According to Mrs. Robinson,
“Utility is the quality of commodities that makes individuals want to buy them.”
According to Hibdon,
“Utility is the quality of a good to satisfy a want.”
Cardinal utility analysis of demand is based upon certain important assumptions. Before explaining how cardinal utility analysis explains consumer’s equilibrium regarding the demand for a good, it is essential to describe the basic assumptions on which the whole utility analysis rests. As we shall see later, cardinal utility analysis has been criticized because of its unrealistic assumptions.
The utility analysis is based on a set of following assumptions:
- The utility analysis is based on the cardinal concept which assumes that utility is measurable and additive like weights and lengths of goods.
- Cardinal or Utility is measurable in terms of money.
- The marginal utility of money is assumed to be constant
- The consumer is rational who measures, calculates, chooses and compares the utilities of different units of the various commodities and aims at the maximization of utility.
- He has full knowledge of the availability of commodities and their technical qualities.
- He possesses perfect knowledge of the choice of commodities open to him and his choices are certain.
- They know the exact prices of various commodities and their utilities are not influencing by variations in their prices.
- There are no substitutes.
Features of Utility Analysis:
The utility analysis has the following main features;
- Usefulness, and.
Now, explain each one;
The utility is Subjective:
The utility is subjective because it deals with the mental satisfaction of a man. A commodity may have different utility for different persons. Cigarette has utility for a smoker but for a person who does not smoke, the cigarette has no utility. Utility, therefore, is subjective.
The utility is Relative:
The utility of a good never remains the same. It varies with time and place. The fan has utility in the summer but not during the winter season.
Utility and usefulness:
A commodity having utility need not be useful. Cigarette and liquor are harmful to health, but if they satisfy the want of an addict then they have utility for him.
Utility and Morality:
The utility is independent of morality. Use of liquor or opium may not be proper from the moral point of views. But as these intoxicants satisfy wants of the drunkards and opium eaters, they have utility for them.
Concept of Utility Analysis:
There are three concepts of utility analysis;
- Total, and.
Now, explain them;
The utility derived from the first unit of a commodity calls initial utility. Utility derived from the first piece of bread calls initial utility. Thus, the initial utility is the utility obtained from the consumption of the first unit of a commodity. It is always positive.
Total utility is the sum of utility derived from different units of a commodity consumed by a household.
According to Leftwitch,
“Total utility refers to the entire amount of satisfaction obtained from consuming various quantities of a commodity.”
Supposing a consumer four units of apple. If the consumer gets 10 utils from the consumption of first apple, 8 utils from the second, 6 utils from third, and 4 utils from the fourth apple, then the total utility will be 10+8+6+4 = 28.
Accordingly, the total utility can calculate as:
TU = MU1+ MU2+ MU3+ + MUn
TU = EMU
Here TU = Total utility and MU1, MU2, MU3, + MUn=
The Marginal Utility derived from the first, second, third…………………….and nth unit.
The Marginal Utility is the utility derived from the additional unit of a commodity consumed. The change that takes place in the total utility by the consumption of an additional unit of a commodity calls marginal utility.
According to Chapman,
“Marginal utility is the addition made to total utility by consuming one more unit of commodity.”
Supposing a consumer gets 10 utils from the consumption of one mango and 18 utils from two mangoes, then. the marginal utility of second .mango will be 18-10=8 utils.
The marginal utility can measure with the help of the following formula MUnth = TUn – TUn-1
- MUnth= Marginal utility of nth unit.
- TUn= Total utility of “n” units, and.
- TUn-1 = Total utility of n-1 units.
Types of Marginal utility:
The following marginal utility can be; positive marginal utility, zero marginal utility, or negative marginal utility.
- Positive: If by consuming additional units of a commodity, total utility goes on increasing, marginal utility will be positive.
- Zero: If the consumption of an additional unit of a commodity causes no change in total utility, the marginal utility will be zero.
- Negative: If the consumption of an additional unit of a commodity causes falls in total utility, the marginal utility will be negative.