Cardinal Utility Approach | 77 |

Utility is a subjective concept. It is something, which exists entirely in the consumer’s mind. It varies
from person to person. Even for the same person, it may vary from time to time. For example, a glass of
water may give an individual more utility on a hot summer afternoon than in the winters. Also, utility is
ethically neutral in that it does not differentiate between bad and good.
Alcohol and tobacco are both harmful but to one who drinks and smokes The utility of a good is the power
it may provide a utility. of the good to satisfy a want.

RECAP
 The utility of a good is the power of the good to satisfy a want.
 Utility is a subjective concept.
 Utility is ethically neutral in that it does not differentiate between bad and good.

CONCEPT OF CARDINAL AND ORDINAL UTILITIES

In Marshall’s theory, the concept of utility is cardinal while the concept to be discussed in Chapter 6 is of
ordinal utility. The concepts of cardinal and ordinal belong to the field of mathematics. One, two, three,
four and the other such numbers are all cardinal numbers. Ordinal numbers are those which can be ranked
or ordered. By how much the first number is greater than the second and the second by the third is not
known. Ordinal utility, analysed by R. G. D. Allen and J. R. Hicks, does not assign any numbers to utility.
In simpler terms, cardinal utility implies that the utility can be measured in quantitative terms. One
can say that a cup of tea gives two times more satisfaction as compared with a glass of milk. However,
in terms of ordinal utility, one can just say that one prefers a cup of tea over a glass of milk. One cannot
assign any numbers while expressing likes and dislikes.
According to the concept of cardinal utility, one can measure the utility in terms of utils.
Professor Marshall was of the view that one can measure the utility in terms of price. The price that a
consumer is willing to pay for a good is an indication of the utility of that good to the consumer. It was
assumed that the utility of money does not change or remains constant.

RECAP
 In Marshall’s theory, the concept of utility is cardinal.
 One can measure the utility in terms of utils.
 The price that a consumer is willing to pay for a good is an indication of the utility of that good to
the consumer.

CARDINAL UTILITY APPROACH

Total Utility
Total utility is the sum of the utility, which a consumer derives from the consumption of the different
units of a good. Suppose a consumer consumes five units of good x. He derives u1, u2, u3, u4 and u5 from
the successive units of the good. The total utility that the consumer derives from the consumption of the
five units of good x is
Ux = u1 + u2 + u3+ u4 + u5

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 | 78 | Managerial Economics

Total utility is the sum of the If the consumer consumes n units of good x, then the total utility
utility, which a consumer that the consumer derives from the consumption of n units of good x is
derives from the consump-
tion of the different units of Un = u1 + u2 + u3 + u4 + u5 + … + un
a good.
If the consumer consumes goods x, y and z, then the total utility that
the consumer derives from the consumption of the goods is
U = Ux + Uy + Uz
where U is the total utility that the consumer derives from the consumption of goods x, y and z; Ux is
the total utility that the consumer derives from the consumption of good x; Uy is the total utility that the
consumer derives from the consumption of good y; and Uz is the total utility that the consumer derives
from the consumption of good z.

Marginal Utility
Marginal utility of a good is the change in the total utility from consuming
Marginal utility of a good is
the change in the total util- an additional unit of the good. Hence,
ity from consuming an addi-
ΔTU
tional unit of the good. MU =
ΔQ
where MU is marginal utility, ΔTU is change in total utility and ΔQ is change in quantity.
Marginal utility can also be expressed in terms of total utility as

MUn = TUn − TUn−1

where MUn is marginal utility from the nth unit of the good, TUn is total utility from n units of the good
and TUn−1 is total utility from (n − 1) units of the good.

RECAP
 Total utility is the sum of the utility which a consumer derives from the consumption of the different
units of a good.
 Marginal utility of a good is the change in the total utility from consuming an additional unit of
the good.

LAW OF DIMINISHING MARGINAL UTILITY

The law of diminishing marginal utility is based on certain assumptions:
(i) The units of the good, which are consumed, are homogenous.
(ii) The good is consumed within a short time without any gaps or any break in between.
(iii) The units of the good consumed are of a standard size and not very small or large.
(iv) The consumer’s income does not change in the period under consideration.
(v) The consumer’s tastes, preferences and habits do not change in the period under consideration.
(vi) The law does not hold good for the collection of say, antiques and rare stamps, since here the
utility increases with the increase in the quantity of the good.

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 Cardinal Utility Approach | 79 |

According to the law of diminishing marginal utility as the quantity According to the law of dimin-
consumed of any one good increases, while the consumption of all ishing marginal utility as the
other goods consumed remains constant, the marginal utility from the quantity consumed of any
good must eventually decrease. As more and more units of a good are one good increases, while
the consumption of all other
consumed, the additional utility to the consumer from each successive goods consumed remains
unit of the good goes on decreasing, assuming that the consumption of constant, the marginal utility
all the other goods does not change. In other words, as additional units from the good must eventu-
of the good are consumed, the total utility from the good increases at a ally decrease.
decreasing rate and may become negative.
Suppose that on a hot summer afternoon a person is very thirsty. The first glass of water that he
drinks gives him the maximum utility. However, the second glass of water also gives him a utility but
which is less than the first glass of water that he drinks. The third glass of water will give him even lesser
utility. Thus, every additional glass of water that he drinks will give him a smaller amount of utility than
the earlier glass. This will happen until he is fully satiated with the water, after which any additional glass
of water may give him a disutility or a negative utility. This aspect of utility where it diminishes with
the consumption of additional units of the good under consideration is called the law of diminishing
marginal utility. The law is also known as the law of satiable wants.
To illustrate the law of diminishing marginal utility, we take a numerical example in Table 5.1, which
is then depicted in a graph in Figure 5.1.

20
18
16
TU
14
10
8
6
4
2
0
1 2 3 4 5 6 7 Qn
–2
MU
Figure 5.1 Total Utility and Marginal Utility

Table 5.1 shows that from the first unit of the good the consumer gets a total utility of eight units.
When he consumes the second unit of the good, his total utility increases to 14 units and with the third
unit it increases to 18. Thus, the total utility is increasing at a diminishing rate. With the consumption
of the fourth unit of the good, his saturation point is reached at 20 units, which remain unchanged even
when he consumes the fifth unit. As the sixth unit is consumed, his total utility starts decreasing. Thus, in
Figure 5.1, the total utility curve increases at a decreasing rate, then reaches a maximum when five units
of the good are consumed and then starts decreasing.

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Table 5.1 Total Utility Schedule and Marginal Utility Schedule

Units Consumed Total Utility Marginal Utility

1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 −2

As far as the marginal utility is concerned, it goes on decreasing with the consumption of every
additional unit of the good and when the fifth unit is consumed it becomes zero at the point of
saturation and thereafter if additional units are consumed it becomes negative causing disutility to
the consumer. Thus, in Figure 5.1, the marginal utility curve slopes downwards showing that marginal
utility decreases as additional units of the good are consumed. It reaches zero and intersects the x axis
when five units of the good are consumed and the consumer is at the point of saturation. Thereafter,
if additional units of the good are consumed, the marginal utility becomes negative. It is important to
note that the total utility for any unit of the good is the sum of the marginal utility till that unit. Thus,
for any quantity of a good, the area under the marginal utility curve would be the total utility for that
quantity of the good.
The marginal utility can also be expressed in terms of the slope of the total utility curve. When
the total utility curve approaches its maximum point, its slope is zero. When total utility is a maxi-
mum, marginal utility is zero as is obvious from Figure 5.1. When total utility is decreasing, marginal
utility is negative. Negative marginal utility implies that you have too much of a good and would
prefer lesser.
A consumer consumes a good for the utility that it gives to him. This utility depends on his intensity
of the desire for the good. The reason as to why the consumer’s utility diminishes is that the intensity of
the desire for the good continues to decrease when he consumes additional units of the good.

A Derivation of the Law of Demand

By using the law of diminishing marginal utility, Marshall derived the demand curve, which is down-
ward sloping showing that there exists an inverse relationship between price and the quantity demanded
of a good. The assumptions on which the analysis has been based are as follows:
(i) The money income of the consumer is given. Hence, he can spend only a limited amount of
money on the goods and services that he prefers.
(ii) The prices of all the related goods, complements and substitutes are given.
(iii) The consumer’s tastes and preferences do not change in the period under consideration.
(iv) The consumer behaves in a rational manner. Given the price of the good and his money income,
the consumer aims at maximizing his utility.
(v) Utility is assumed to be cardinal.
(vi) Utility is additive in that to arrive at total utility, the utility from different goods can be added
together.

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