Page 31 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Objectives

After studying this unit, students will be able to:

• Know the Law of Diminishing Marginal Utility.
• Understand the Law of Equi-Marginal Utility.
• Know the Importance of the Law.
• Know the Modern Statement of the Law.

Introduction

To begin, we need a description of the goods and services that a consumer may consume and his
monthly income. How a rational consumer would make consumption decisions? In economics we say
commodity to goods and services. If his income meets his desire and brings satisfaction in his life. To
understand this, in economics three theories have been established:
(1) Cardinal Utility Analysis (2) Ordinal Utility Analysis or Indifference Curve Analysis (3) Revealed
Preference Analysis.

What is Utility?

Utility refers to the total satisfaction received from consuming a product or service. In clear terms want-satisfying
capacity of a product is called Utility. Any goods or service may have good or bad utility. For example, a cigarette smoker
feels satisfaction with every puff; no doubt it is dangerous to health.

3.1 Cardinal Utility Analysis
In the 19th century, the neo-classical economists like Duipit, Gossen, Walras, Menger and Jevons put
forward cardinal utility analysis criticizing the classical thought propagated by Adam Smith, Ricardo
and others. While in 20th Century, Marshall and Pigou further elaborated Cardinal Utility Analysis.
According to this analysis utility can be measured in cardinal numbers such as 1, 2, 3, 4 etc. Cardinal
numbers either can be added or subtracted. Fisher has used this term “Util” as measure of utility. Thus
in terms of cardinal utility analysis it can be said that one gets from a cup of tea 10 units, 5 units from a
cup of coffee.

Cardinal Utility and Ordinal utility theory

According to Cardinal utility theory, utility can be measured in cardinal numbers such as 1,2,3,4 etc and these numbers
either can be added or subtracted. While Ordinal utility theory holds that the utility of a particular goods or service
cannot be measured using a numerical scale bearing economic meaning in and of itself. Ordinal utility implies merely
quality and ranking of the level of satisfaction experienced.

3.2 Total and Marginal Utility

According to the Utility measurement there may be two concepts: (1) Total Utility and (2) Marginal
Utility.

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