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    Utility and Types of Utility

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    harek1544
    There are two types of utility: cardinal utility and ordinal utility. Cardinal utility can be measured numerically in units called utils, while ordinal utility ranks preferences but does not assign numeric values. Some key assumptions of the cardinal approach are: 1) consumers rationally seek to maximize utility given prices and income, 2) tastes and preferences determine how consumption affects total utility, and 3) the marginal utility of additional consumption diminishes. Consumer equilibrium in the cardinal approach occurs where the marginal utility of money equals the price of a good, indicating the point at which utility is maximized within the consumer's budget.

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    Utility and Types of Utility

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    harek1544
    20 views2 pages
    There are two types of utility: cardinal utility and ordinal utility. Cardinal utility can be measured numerically in units called utils, while ordinal utility ranks preferences but does not assign numeric values. Some key assumptions of the cardinal approach are: 1) consumers rationally seek to maximize utility given prices and income, 2) tastes and preferences determine how consumption affects total utility, and 3) the marginal utility of additional consumption diminishes. Consumer equilibrium in the cardinal approach occurs where the marginal utility of money equals the price of a good, indicating the point at which utility is maximized within the consumer's budget.

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    MEC, Utility and its types

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    Utility and types of Utility

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    There are two types of utility: cardinal utility and ordinal utility. Cardinal utility can be measured numerically in units called utils, while ordinal utility ranks preferences but does not assign numeric values. Some key assumptions of the cardinal approach are: 1) consumers rationally seek to maximize utility given prices and income, 2) tastes and preferences determine how consumption affects total utility, and 3) the marginal utility of additional consumption diminishes. Consumer equilibrium in the cardinal approach occurs where the marginal utility of money equals the price of a good, indicating the point at which utility is maximized within the consumer's budget.

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    © All Rights Reserved
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    Download as pdf or txt
    20 views2 pages

    Utility and Types of Utility

    Uploaded by

    harek1544
    There are two types of utility: cardinal utility and ordinal utility. Cardinal utility can be measured numerically in units called utils, while ordinal utility ranks preferences but does not assign numeric values. Some key assumptions of the cardinal approach are: 1) consumers rationally seek to maximize utility given prices and income, 2) tastes and preferences determine how consumption affects total utility, and 3) the marginal utility of additional consumption diminishes. Consumer equilibrium in the cardinal approach occurs where the marginal utility of money equals the price of a good, indicating the point at which utility is maximized within the consumer's budget.

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    of 2

    Q. 1) What is utility? How many types of utility?

    Concept of Utility
    In Economics, the term utility refers to the quantity of the commodity by which it satisfies our wants. In other words,
    the want-satisfying power of a good is called utility. This is assumed to be measured in terms of cardinal numbers;
    such as 1, 2, 3, etc. These numbers are called utils or the units of utility.
    Concept of Consumer Behaviours
    Customers can't maximize their utility unless they can measure it. Hence, utility must be a measurable concept. The
    measurement is taken differently in different approaches.
    In the traditional frame we have two types of measurement of utility:-
    1) Cardinal Analysis /cardinal utility
    2) Onderal Analysis/ Ordinal utility
    Basic Theme of this chapter
    There are different approaches to analyse the commodity obtained by the consumer. But, in all approaches it is
    assumed that the consumer is rational. This means that the Consremen's objective is to maximise her utility by
    choosing one commodity brendle from among all the commodity bundles where money income and the prices of the
    commodity are given to the consumer.

    Cardinal Approach Vs. Ordinal Approach


    Cardinal Approach Ordinal Approach

    1- In this approach utility can be measured cardinally 1- In this approach, utility is ranked.

    2- For example- 2- For example -


    Burger - 4 utils Ice-cream - 1
    Pizza - 3 utils Burger- 2
    Ice- cream - 8 utils Pizza- 3

    3- Cardinal Approach is introduced by Alfred Marshall 3- Ordinal Approach is introduced by Allen and Hicks.

    4- Two concepts are there 4- Two concepts are there-


    ● Law of diminishing marginal utility ● Indifference curve
    ● Law of equi-marginal utility ● Budget line
    5- This approach deals with single or double
    commodity. 5- This approach deals with only double commodity.

    6- This approach deals with quantitative method. 6- This approach deals with qualitative methods.

    7- MUm remains constant. 7- It is not necessary to be constant.

    8- This approach is also known as utility analysis. 8- This approach is also known as indifference curve
    analysis.

    Cardinal Theory
    In this approach, utility is measured cardinally or numerically in terms of money such as 1, 2,3,4, etc. This approach
    or we can say utility is measured in terms of utils. Utile refers to the unity of utility. For example we consume pizza,
    burgen and ice-cream, then a lot of these some will according to our Preferences.
    Pezza- 10 utils
    Ice-Cream - 5 utils
    Buren - 2 utils
    The consumer knows which commodity is preferred but also by what amount.
    Asstemplions
    The assumptions of they approach is given below-
    1) Consumer is Rational The consumer's objective is to maximize her utility by choosing one commodity bundle from
    all other available commodity bundles at the geven prices of commodities and money income.
    2)Taste and Preferences
    If the taste and preferences are given, the total utility of the consumer depends on the quantity of consumptions.
    3- Limited Resources
    The consumer has limited money to spend on the purchases of goods and services and this makes the consumer
    buy those commodities first which is a necessity for them.
    4- Diminishing marginal Utility With the increase of the consumption of the commodity the utility derived from each
    successive unit goes on diminishing. As 'x' increases, MUx decreases and vice-versa. Therefore, the MUx curve is
    downward sloping.
    5- Utility is measured cardinally
    Since it is measured numerically or cardinally, consumer not only knows which commodity brendle is preferred but
    also by how much amount
    6- Marginal utility of money is constant
    MUm = λ(lemda) where λ is positive and constant. That means as money income increases by one unit, utility
    increases by λ unit and vice-versa.
    Consumer Equilibrium
    It is a situation where a consumer secures maximum satisfaction with a minimum budget.
    Tabular Presentation
    Units MUx Px MUm

    1 12 2 6
    2 8 2 4
    3 4 2 2
    4 0 2 0
    5 -4 2 -2

    Where MUm = MUx


    Px
    Consumer is in equilibrium, where MUm = Px
    Where MUm is MUx (in terms of money)
    At unit 3, Consumer is in equilibrium.

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