Consumer Behaviour : Cardinal and Ordinal Utility Analysis
Consumer behavior is the process whereby individuals decide what and how
much to purchase goods and service for personal consumption. in this regard,
three approaches have been developed:
Utility analysis (cardinal utility analysis)
Indifference curve analysis (Ordinal Utility analysis)
Revealed preference theory
Cardinal Utility analysis
A consumer will be in equilibrium when he/she spends his/her given income on the
purchase of different goods in such a way so as to maximize his/her total utility.
Cardinal utility analysis is based on certain assumptions:
Consumer is rational: The consumer is assumed to be rational. It is assumed
that the consumer has full knowledge of all the information relevant to
his/her decision. Given his income and the market prices of the commodities,
he/she plans his/her expenditure so as to attain the highest possible
satisfaction or utility.
Utility is cardinal: according to this analysis utility is cardinal. Cardinal utility
is the utility where the satisfaction derived from consumption of a good can
be expressed in numbers.
Diminishing marginal utility: the utility gained from successive units of the
commodity diminishes. In other words, the marginal utility of a commodity
diminishes as the consumer acquires larger quantity of it.
Constant marginal utility: marginal utility of money refers to the utility that
a consumer expects to obtain from a standard basket of goods which he or
she can buy for a rupee. Constant marginal utility of money implies that
whatever the level of income, the marginal utility of money remains the
same.
Utility is additive: utility is not only cardinally measurable but also can be
added together to obtain total utility.
Meaning of Utility
Utility can be defined as the amount of satisfaction derived from the consumption
of a commodity. The main characteristics of utility are:
Utility is subjective; utility depends on the individual’s own subjective
estimate of the amount of satisfaction he or she is likely to get from a
commodity.
Utility is relative in nature: utility of a commodity to a person depends on
his intensity of desire for the commodity the greater the need, the greater
is the utility. Therefore, utility varies from person to person, place to place
and time to time.
Utility is different from usefulness; utility does not implies that a good is
useful. A commodity may possess utility even though it may not be useful.
Classification of Utility:
1. Total Utility
2. Marginal Utility
Total Utility: total utility refers to the total satisfaction derived by the consumer
from the consumption of a specific quantity of a commodity. It is a direct function
of a number of units of the commodity.
It cans be computed as the sum of marginal utilities of various units of a
commodity.
TUn = MU1 + MU2 +……MUnth
Marginal Utility: It refers to the additional utility derived from the consumption of
an additional unit of a commodity. It is an addition made to the total utility by
consuming one more unit of a commodity.
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑢𝑡𝑖𝑙𝑡𝑖𝑦
Marginal utility =
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛𝑛
∆𝑇𝑈
MU =
∆𝑄
Forms of Marginal Utility:
1. Positive Marginal Utility: if Total utility increase from the consumption of
additional unit of a commodity, then marginal utility will be positive.
2. Zero marginal utility: (perfect saturation point) : if the consumption of
additional unit of a commodity causes no change in the total utility, then
marginal utility is Zero. At this level of consumption, total utility is as its
maximum. This point is also known as the point of satiety or perfect
saturation point.
3. Negative marginal utility: if the consumption of an additional unit of a
commodity results in fall in total utility, then the marginal utility is negative.
It is also known as disutility.
Utility Schedule:
Unit of a commodity TU (utils) MU (utils)
1 6 6
2 6+4 = 10 4
3 10+2= 12 2
4 12+0 = 12 0
5 12-2 = 10 -2
6 10-4 = 6 -4
Relationship between TU & MU:
The total utility curve is concave from above, indicating declining slope of the
curve which means declining marginal utility. Up to a certain point TU curve
has positive slope, but its slope goes on decreasing steadily as quantity
consumed is increased. This shows that so long as TU increases, MU is
positive. But MU decreases because TU increases at a decreasing rate.
When TU is maximum, MU is zero.
After a certain point the total utility curve has a negative slope, showing that
the marginal utility is negative. Thus, when total utility declines marginal
utility is negative.
The relationship between TU & MU is summarized as:
When Marginal utility Then total Utility
Decreases but remains positive Increases at a decreasing rate
Is zero Is maximum
Becomes negative Starts decreasing.
