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Unit 5: Consumer Behaviour: Cardinal Approach

Marginal Utility (MU) Notes

A change in the total utility while consuming one more unit in a given period of time is called
marginal utility. In the other words, additional made in total utility due to the consumption of
one more unit of commodity is known as marginal utility. An additional utility derived from an
additional unit of commodity in a given period of time is marginal utility. It can be expressed
as:
Change in total utility
MU =
Change in commodity
Cardinal and Ordinal Utility

There are mainly two kinds of measurement of utility implemented by economists: cardinal
utility and ordinal utility.
Utility was originally viewed as a measurable quantity, so that it would be possible to measure
the utility of each individual in the society with respect to each good available in the society, and
to add these together to yield the total utility of all people with respect to all goods in the society.
Society could then aim to maximise the total utility of all people in society, or equivalently the
average utility per person. This conception of utility as a measurable quantity that could be
aggregated (summed up) across individuals is called cardinal utility.
Cardinal utility quantitatively measures the preference of an individual towards a certain
commodity. Numbers assigned to different goods or services can be compared.

Example: For a coffee addict, a utility of 100 utils towards a cup of cappuccino is twice
as desirable as a cup of tea with a utility level of 50 utils.
The concept of cardinal utility suffers from the absence of an objective measure of utility.

Example: The utility gained from consumption of a particular good by ‘A’ will be
different than ‘B’.
Ordinal utility represents the utility, or satisfaction derived from the consumption of goods and
services, based on a relative ranking of the goods and services consumed. With ordinal utility,
goods are only ranked only in terms of more or less preferred, there is no attempt to determine
how much more one good is preferred to another.

Example: You may prefer to consume or buy more apples than bananas while your
friend may prefer to consume or buy more bananas than apple.

Ordinal utility is the underlying assumption used in the analysis of indifference curves.
5.3 Laws of Utility

There are two major laws of utility, as discussed below:

Law of Diminishing Marginal Utility

Marginal utility refers to the change in satisfaction which results when a little more or little less
of that good is consumed.

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