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    Cardinal Utility Analysi2

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    Kaushik Nath
    This document summarizes Cardinal utility analysis proposed by Professor A. Marshall. It introduces concepts like total utility, marginal utility, and the law of diminishing marginal utility. The law states that as a person consumes successive units of a commodity, the marginal utility of each additional unit gradually diminishes. The document also discusses assumptions of the law, drawbacks, and how a consumer will purchase units of a commodity up to the point where marginal utility equals price. It concludes by explaining the law of equi-marginal utility which determines a consumer's equilibrium purchase of two goods with a fixed income.

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    Cardinal Utility Analysi2

    Uploaded by

    Kaushik Nath
    37 views6 pages
    This document summarizes Cardinal utility analysis proposed by Professor A. Marshall. It introduces concepts like total utility, marginal utility, and the law of diminishing marginal utility. The law states that as a person consumes successive units of a commodity, the marginal utility of each additional unit gradually diminishes. The document also discusses assumptions of the law, drawbacks, and how a consumer will purchase units of a commodity up to the point where marginal utility equals price. It concludes by explaining the law of equi-marginal utility which determines a consumer's equilibrium purchase of two goods with a fixed income.

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    This document summarizes Cardinal utility analysis proposed by Professor A. Marshall. It introduces concepts like total utility, marginal utility, and the law of diminishing marginal utility. The law states that as a person consumes successive units of a commodity, the marginal utility of each additional unit gradually diminishes. The document also discusses assumptions of the law, drawbacks, and how a consumer will purchase units of a commodity up to the point where marginal utility equals price. It concludes by explaining the law of equi-marginal utility which determines a consumer's equilibrium purchase of two goods with a fixed income.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    37 views6 pages

    Cardinal Utility Analysi2

    Uploaded by

    Kaushik Nath
    This document summarizes Cardinal utility analysis proposed by Professor A. Marshall. It introduces concepts like total utility, marginal utility, and the law of diminishing marginal utility. The law states that as a person consumes successive units of a commodity, the marginal utility of each additional unit gradually diminishes. The document also discusses assumptions of the law, drawbacks, and how a consumer will purchase units of a commodity up to the point where marginal utility equals price. It concludes by explaining the law of equi-marginal utility which determines a consumer's equilibrium purchase of two goods with a fixed income.

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    Download as doc, pdf, or txt
    of 6

    Cardinal utility analysis

    Proposed by Prof. A. Marshall

    Main presumption : utility is measurable in terms of money.

    1 unit of utility from a commodity = Re 1 spend on it

    Total utility (TU) : total satisfaction received from all the


    units consumed

    Marginal utility (MU) :utility received from consumption of


    one additional unit of a good
    MU = ∆ TU / ∆ x = TUn – TU n-1
    Where x ≡ the good being purchased

    Law of diminishing Marginal Utility

    The law states that when a person consumes successive units


    of a commodity, the marginal utility from each successive
    unit gradually diminishes and finally becomes negative. The
    total utility first increases and then falls.

    Assumptions of the law

    1) The consumer is rational.

    2) The commodity is a normal good and the consumer’s need


    for the good is not satiated.

    3) The commodity is finely divisible.


    4) The consumer purchases all units successively ,i.e. there is
    no time gap between successive consumption.

    5) The price of the commodity and the money income of the


    buyer remains constant during analysis.

    6) There is no improvement in the quality of the product.

    Table showing diminishing MU

    No. TU MU
    of
    units
    1 8 -
    2 15 7
    3 20 5
    4 22 2
    5 22 0
    6 20 -2

    UTILITY

    TU

    UNITS
    CONSUMED
    MU
    Figure showing relation between TU and MU
    Drawbacks of the law

    a) The most important criticism of the law is that utility is a


    state of mind and is not measurable.

    b)Most of the assumptions of the law are unrealistic and


    may not hold usually.

    c) The law will not hold in case of items of luxury or snob


    consumption.

    d)In cases like the water-diamond paradox, the law will not
    hold.

    e) The law will not hold in case of goods which are durable
    or are purchased in single units.
    CONSUMER’S EQUILIBRIUM PURCHASE

    Up to what level would a consumer consume a particular


    commodity ?

    A consumer is willing to purchase a unit as long as the utility


    from that unit is greater than or equal to the [price paid for it.
    If price is fixed or falls for every successive unit, he will
    purchase up to that unit when MU = P

    units P MU
    1 8 12
    2 8 11
    3 8 9
    4 8 8
    5 8 6 E P

    MU
    Equilibrium Purchase of two goods : Law of equi -
    marginal utility

    When a person with fixed money income purchases 2 goods


    whose prices are given, his eqlb purchase of the 2 goods is
    determined by the law of equi marginal utility.

    The law states that when a person buys 2 goods, then eqlb
    purchase is when the MU from each additional unit of
    money(i.e.each rupee) spend on each good must be equal.

    Let the 2 goods be X and Y

    Then eqlb purchase for X is MUx = Px

    eqlb purchase for Y is MUy = Py

    Utility from Rs. Px expd on X = MUx

    “ “ Re. 1 “ “ “ = MUx / Px

    Similarly, “ “ “ “ “ Y = MUy / Py

    Thus, in eqlb MUx / Px = MUy / Py = MUm

    Where MUm = MU of money, i.e. utility from


    holding Re. 1

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