What is Cardinal Utility Analysis? | What is Total Utility? | What is Marginal Utility? | What is Law of Diminishing Marginal Utility?
Introduction
We discussed in detail in the previous sessions about
Utility and the factors that are important and to be considered while studying
utility of a product that can be good or service. In its most simple sense,
utility is the satisfaction that a consumer derives from consuming a particular
product. The more the consumer wants a particular product, the more the consumer
will derive utility from that product. So utility of a product for a consumer,
is product’s want satisfying capacity. Then we discussed what are the factors that
are to be considered while studying utility of a product. The utility derived from
a particular same product can be different for different people. And even for
the same product, utility derived by a person differs according to the time and
place of consumption.
Consumer behavior is the study of the economic decision
making by consumer regarding demand of want satisfying goods and services in a
prioritized manner as resources to purchase the goods and services are limited
whereas the needs and wants of consumer are unlimited.
Now in studying consumer behavior, utility comes as the
central theme as discussed above, because any decision to consume a product
will be taken by consumer depending upon the level of utility or satisfaction
the consumer derives from consuming the product.
Now based on utility, there are two approaches that can used
to study the consumer behavior which are
1) 1) Cardinal Utility Analysis
2) 2) Ordinal Utility Analysis
Today we will discuss the Cardinal Utility Analysis in
detail.
Cardinal Utility Analysis
Cardinal Utility Analysis is a type of utility analysis used
to study consumer behavior where we assume that the level of utility derived
from a particular product, may be a good or service or any commodity can be
measured in numbers. For example, for a person we can say that utility derived
from a pizza is 25 units, so here we measured the utility derived from pizza in
numbers, which is the central theme of Cardinal Utility Analysis.
But before dwelling in detail to discuss Cardinal Utility
further, it is important to know that there are two measures of utility that we
employ to study the utility in numbers; which are
1) 1) Total Utility
2) 2) Marginal Utility
Total Utility (TU)
Total utility refers to total satisfaction derived from a
fixed quantity of a particular product. Here one thing which is important to be
considered is that we always measure the total utility for a fixed quantity of particular
product or commodity. So bigger the quantity of a particular product or a
commodity, the more the total utility will be of that product. So total utility
directly depends upon the quantity of the product or commodity consumed.
Total Utility of a product A for a given number of units of
product A can be described as TU(n) of A.
Marginal Utility (MU)
Marginal Utility refers to the change in Total Utility (TU)
from consumption of one additional unit of a particular product or commodity.
So to say, Marginal Utility is the increase in Total Utility of a product when
one more unit of product is consumed over and above the fixed quantity considered
to calculate the Total Utility.
For example, the Total Utility derived from consumption of two
pizzas is 40 units and total utility derived from the consumption of three
pizzas is 50 units. So it can be clearly seen, that consumption of the 3rd
pizza led to an increase in total utility by 10 units. We can say here that,
the change in Total Utility from 40 units to 50 units that is 10 units (50-40),
due to addition of 1 more pizzas is the Marginal Utility of that additional units
of pizza. So to say, the Marginal Utility of that 3rd pizza is 10
units.
We can write the above example as a formula as follows;
Marginal Utility of 3rd unit of Pizza = Total
Utility of 3 pizzas – Total Utility of 2 Pizzas
MU (3) = TU (3) – TU (2)
We can relate the Total Utility and Marginal Utility as
follows;
MU (n) = TU (n) – TU (n-1)
And another way to look at it is, if you break down the
Total Utility, we find that the Total Utility is built up Marginal Utility of
each unit.
In above example, the total utility of n units of pizzas is
Marginal Utility of 1st pizza plus Marginal utility of 2nd
Pizza added till Marginal Utility of nth unit of Pizza.
In formula form;
TU (n) = MU (1) + MU (2) + … + MU (n)
So total utility of a fixed quantity of a particular product
is the sum of marginal utility of each individual quantity of that particular
product.
Law of Diminishing Marginal Utility
After understanding the concept of Total Utility and
Marginal Utility, we will now move on to understand how they both function
together and how they both are useful in understanding the consumer behavior as
regards to its economic decision making.
We will understand the same through an example.
Here in this table, we have values of total utility and
marginal utility derived from consumption of different amount of a commodity.
|
Amount of commodity Consumed |
Total Utility |
Marginal Utility |
|
1 |
16 |
16 |
|
2 |
22 |
6 |
|
3 |
26 |
4 |
|
4 |
28 |
2 |
|
5 |
28 |
0 |
|
6 |
26 |
-2 |
Explanation
Note here, as the quantity of amount consumed of a
particular product consumed is increasing the total utility is increasing but
the Marginal utility of the same is decreasing. If we see with 1 unit consumed,
the total utility derived is same as Marginal utility. When the second unit is
added, the total utility increased but marginal utility decreased. It means
that by adding a unit more in consumption, there is addition of utility but the
addition i.e., the marginal utility gets smaller and smaller. Means the additional
(marginal) utility or satisfaction derived from every additional unit of commodity
consumed keeps diminishing. This phenomenon happens because as the consumer has
already consumed some amount of quantity, the desire to have more of that keeps
on decreasing. As desire to consume the additional quantity becomes weaker, it
is obvious that the satisfaction received from that additional quantity also
becomes lesser. This phenomenon is known as Law of Diminishing Marginal
Utility.
We can see here in this graph.
Defining Law of Diminishing Marginal Utility...
Law of Diminishing Marginal Utility says that the Marginal
Utility derived from each additional unit of product keeps diminishes as
consumption of a particular product increases, keeping consumption of other
products same.
Conclusion
In this session, we understood in detail the meaning of
utility and the types of utilities. In types of utilities, we discussed the
Cardinal Utility Analysis approach to study the consumer behavior. We saw that there
are measures of utility namely Total Utility and Marginal Utility. Then we also
discussed the relation between Total Utility and Marginal Utility. And finally
we discussed the Law of Diminishing Marginal Utility.
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