Cardinal and Ordinal

1. Managerial Economics
Topic : UTILITY ANALYSIS
Presented by-
 Mr. V. GURUMOORTHI
 ASST. PROFESSOR
 DEPT. OF COMMERCE

2. What is Utility?
-Product angle: Want satisfying property of any product
(absolute).
-Consumer angle: The psychological feeling of satisfaction
or happiness or well being or benefit derived by the
consumer by the consumption of certain units of a good or
service at a certain point of time (subjective).
Hypothetical measure is “utils”.

3. Utility can be measured in two
ways:
-Cardinal Utility: Assigning numerical values to the
amount of satisfaction. Such as, 1, 2, 10, 15…. etc,
-Ordinal Utility:: Indicating by the rank values to the
amount of satisfaction. Such as, Ist, IInd, IIIrd,…etc.

4. Utility is of two types:
-Total Utility
-Marginal Utility

5. Total Utility
•The total satisfaction of wants & needs obtained from the
consumption of goods & services.
• Sum of utility derived by consumer from multiple units
consumed at a point or over a period of time.
• Example: A consumer consumes 3 units of X and
derives utility u1, u2, u3 and u4
Total Utility Ux= u1 + u2 + u3

6. Marginal Utility
The change in total utility (TU) derived from
one additional unit of consumption (X)
MU = TU/ X
Its also known as additional utility.

7. Law of Diminishing Marginal Utility
“This law states that “as a consumer consumes
more and more units of a specific commodity , the
satisfaction derived from each successive unit goes
on decreasing”- Gossen’s
Also known as Gossen’s first law

8. Law of Diminishing Marginal Utility

9. -20
-10
0
10
20
30
40
50
60
70
1 2 3 4 5 6
total utility
marginal utility

10. Diagrammatic
Representation
0
5
10
15
20
25
30
35
0 2 4 6 8
Total utility. utils
-4
-2
0
2
4
6
8
10
12
0 2 4 6 8
Marginal utility utils
UNITS OF icecream Total Utility MarginaUtility
0 0 0
1 10 10
2 18 6
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

11. 1 Ice Cream you feel Ecstatic
Example
As an example assume you have
one ice cream,

12. 12
You have a second Ice cream
2nd Ice Cream, u still feel Ecstatic

13. 13
You have the third Ice cream
3rd Ice Cream You Feel Very Happy

14. 14
You have the fourth Ice Cream
4th Ice Cream You Feel
Happy

15. 15
You have the fifth Ice Cream,
5th Ice Cream You Still Feel
Happy

16. 16
You have the sixth Ice Cream
6th Ice Cream You are
not so Happy

17. 17
You have the seventh Ice Cream
7th Ice Cream You are
not so Happy

18. 18
You have the eighth Ice Cream
8th Ice Cream
You fall sick

19. Units Total Utility Marginal Utility
1st ice cream 20 20
2nd ice cream 32 12
3rd ice cream 40 8
4th ice cream 44 4
5th ice cream 45 1
6th ice cream 45 0
7TH ice cream 42 -3
8th ice cream 40 -5
The following table will make the law of
diminishing marginal utility more clear

20. Assumptions
Law of Diminishing MU holds only under certain
conditions (assumptions) :
1. Unit of the product s.b. standard – cup of tea,
bottle of cold drink, etc.
2. No small units are consumed
3. Consumer’s taste/preference must remain same
during period of consumption
4. There must be continuity in consumption (∆t =
short)
5. Mental condition of the consumer must remain
normal during the period of consumption
20

21. Limitations/Exceptions
of Law of Diminishing Marginal Utility
(i) Case of intoxicants: The more a person drinks liquor, the
more s/he likes it.
(ii) Rare collection: If there are only two diamonds in the
world, the possession of 2nd diamond will push up the
marginal utility.
(iii) Application to money: It is true that more money the
man has, the greedier he is to get additional units of it.
However, the truth is that the marginal utility of money
declines with richness but never falls to zero.

22. Conclusion
 We can say that the law of diminishing utility, like other laws of
Economics, is simply a statement of tendency. It holds good, provided
other factors remain constant.

23. Thank you !!!