cardinal and ordinal utility analysis.

It contain information on cardinal and ordinal utility analysis.

1. Cardinal and Ordinal Utility
Analysis

2. Cardinal Utility(Alfred Marshall )
1.According to cardinal approach, utility
can be measured.
2.An example:-an apple may yield to a
consumer a utility or satisfaction of 20
units whereas an orange yields him a
utility of 10 units.
3.Therefore , that the consumer gets twice
as much utility from an apple as that from
an orange.

3. TYPES OF UTILITY.
•1) Form utility
•2) Place utility
•3) Time utility and
•4) Service utility.

4. The Law of Diminishing Marginal Utility
1.A consumer consume more and more units of the same
commodity during a particular time, the utility he
derives from the successive units will diminish. In other
words, the additional satisfaction derived from the
additional units of a commodity goes on decreasing.
2.Alfred Marshall defines the ‘Law of Diminishing
Marginal Utility’ as “The additional benefit which a
person derives from a given increase of his stock of a
thing diminishes with every increase in the stock that he
already has.”

5. Assumptions of the Law:
1. The law of diminishing marginal utility is based on the cardinal
measurement of utility.
2. Utility is measured in terms of money. The law assumes that the
marginal utility of money is constant.
3. There should not be any time gap between the consumption of one
unit and the other unit.
4. The units of the commodity are homogeneous us. i.e., they are alike
in size and quality.
5. The consumer is assumed to be a rational economic man. He has the
knowledge about the market.

6. Total and Marginal Utilities
1.Total Utility: Total utility means the total satisfaction attained by
the consumer from all the units of a commodity taken together in
the consumption of a certain thing at a time.
2.Marginal Utility: Marginal utility is the additional utility obtains
from an additional unit of any commodity consumed or acquired.


MUx = ∆TUx/ ∆TQx

7. Explanation of the Law of Diminishing
Marginal Utility
•We can observe that as the units of the commodity ‘X’ is increase, the
marginal utility derived from each success units tends to diminish.
•The total utility increases at diminishing rate till the 6th ‘X’.
•At that level total utility becomes maximum, and marginal utility is
zero.
•After this level total utility declines and marginal utility becomes
negative.
•Zero marginal utility implies the point of satiety which indicates the
complete satisfaction of a given want.

8. Diagram & Table Explanation
The Law of Diminishing Marginal
Utility
-5
0
5
10
15
20
25
30
35
1234567
X goods
T
o
t
a
l
/
M
a
r
g
i
n
a
l

U
t
i
l
i
t
i
e
s
X UnitsTotal
Utility
Marginal
Utility
1 10 -
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

TUC
MUC

9. The relationship between total utility and
marginal utility
1. When total utility increases at diminishes
rate, marginal utility diminishes.
2. When total utility is maximum, marginal
utility becomes zero.
3. When total utility decreases, marginal
utility becomes negative.

10. Importance of the Law:
1. Useful to Finance Minister.
2. Basis for the theory of value.
3. Basis for the Demand and explains the
negative slope of demand curve.
4. Determination of optimum consumption.
5. Useful in the distribution of wealth.

11. The Law of Equi Marginal
Utility:
1.The law of equi marginal utility explains as to how a
consumer distributes his limited income among
various commodities
2.He will spend his income in such away that the last
rupee spent on each of the commodity gives him the
same marginal utility.
3.The law of equi-marginal utility has been stated by
Marshall as follows “If a person has a thing which
can be put to several uses, he will distribute it
among the uses in such a way that it has the same
marginal utility in all”

12. Assumptions of the Law:
1. The utility is cardinally measurable.
2. The marginal utility of money remains constant.
3. Consumer has a limited amount of income and he spends
the entire amount.
4. The wants and habits of the consumer remain constant.
5. The consumer is rational. He tries to get maximum
satisfaction.
6. The consumer spends his income in small quantities while
purchasing the commodities.

13. Illustration of the Law:-
• Figures in the brackets shows as to how the consumer
spent his Rs 5/- on two types of commodities.
• Let us assume that the price of each commodity is
one rupee.
•The consumer starts spending his first rupee on X
because the highest marginal utility on X is 10 utils.
•In the same way he spends his 2nd, 3rd, 4th and 5th
rupee on the commodities which gives highest utility.
•Thus the total utility obtain from X and Y will be 38.
•In this way the consumer spends his entire income on
X and Y in such way that the last rupee spent on X and
Y gives the same marginal utility.
•Thus the consumer gets maximum satisfaction
UnitsMux Muy
1 10(1)8 (2)
2 8 (3)6 (4)
3 6 (5)4
4 4 2
5 2 0
Total30 20

14. Equi-Marginal Utility
0
2
4
6
8
10
12
1 2 3 4 5
Quantity of commodities
M
a
r
g
i
n
a
l

U
t
i
l
i
t
y
mux
muy

15. Importance of the Law:
1. The law explains as to how a consumer maximizes
his satisfaction from his limited recourses.
2. Optimum allocation of the recourses can be
possible by applying this principle.
3. While imposing taxes, the government is cautious
that the marginal sacrifice of all the taxpayers is the
same.

16. Ordinal utility
1.According to the concept of ordinal utility ,the utility
cannot be measured ; it can only be compared.
2.A person can only compare the utility he gets from the first
unit of orange with the utility he gets from the second unit of
orange.
3.This analysis is known as indifference curve analysis.

17. Indifference curve:-
•Indifference curve is graph showing different bundles of
goods between which a consumer is indifferent.
•One can equivalently refer to each point on the
indifference curve as rendering the same level of utility
(satisfaction) for the consumer.
•This means that if the consumer is presented with a
number of various combinations of goods , he can order or
rank them in a ‘scale of preference’..

18. Properties of Indifference Curve
•Downward sloping.
•Convex to the origin.
•Non-intersecting.
•A higher level indifference curve represents
a higher level of satisfaction than a lower
level indifference curve.

19. Indiifference schedule
Combinations Good(x) Good(y)
i 1 12
ii 2 8
iii 3 5
iv 4 3
v 5 2

20. Indifference curve mapping:-
IC2
IC
IC1
Good x
G
o
o
d

y

21. Assumptions
•Good are homogeneous and divisible.
•The consumer seeks maximum satisfaction.
•Taste and preference of the consumer is remain constant.
•Prices of goods are given and constant for him.
•Consumer has to spend whole of his given money on the
two goods.

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