This document discusses Alfred Marshall's cardinal utility approach to microeconomics. It provides three key points:
1. Alfred Marshall was a founder of neoclassical economics and introduced concepts of demand and supply. He developed the cardinal utility approach which measures satisfaction in quantitative units called "utils".
2. Marshall's cardinal utility approach includes the law of diminishing marginal utility, which states that as consumption of a good increases, the marginal utility from each additional unit decreases.
3. The law of equi-marginal utility holds that consumers allocate their income across different goods to equalize marginal utility, obtaining maximum total utility.
In the market economy Consumer must be bid for what they wish to buy and must thus reveal their preferences to produce. Producer, in trying to maximize their profits, will produce what consumer want to by and will do so at least cost.
In reality, various difficulties arise. imperfect competition, production may be decreasing cost, Consumer may lack of information.
In the market economy Consumer must be bid for what they wish to buy and must thus reveal their preferences to produce. Producer, in trying to maximize their profits, will produce what consumer want to by and will do so at least cost.
In reality, various difficulties arise. imperfect competition, production may be decreasing cost, Consumer may lack of information.
In economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing a second (or more) market distortion may partially counteract the first, and lead to a more efficient outcome.
In economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing a second (or more) market distortion may partially counteract the first, and lead to a more efficient outcome.
The law of diminishing marginal utility is a law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
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1. PAJANCOA&RI, Karaikal- 609603
DEPARTMENT OF AGRICULTURALECONOMICSANDEXTENSION
AEC 501- Microeconomics theory and applications
Assignment on :- Cardinal utilityapproach
COURSE TEACHER: Dr. A.Pouchepparadjou
Presented by
Gopishankar.S
2. Cardinal utility approach
The cardinal utility approach was founded by Alfred Marshall.
He was one of the most influential economists of his time.
Alfred Marshall was regarded as the father of neoclassical economics.
He contributed to the introduction of demand and supply concepts as well.
As of now, we will discuss Alfred Marshall Cardinal Utility Approach.
3. Cardinal means anything which can be measured in terms of
numbers.
For example, 1,2,3, etc.
We assume the units for the measurement under this approach as
‘Utils’.
For example, a basket of oranges offers 10 utils of utility
to a consumer.
Utility means use-value.
What it means…
4. The basic characteristics of utility:-
The utility is a quantitative measure of satisfaction, which means it can
be represented in terms of numbers or quantity.
Utility depends on the intensity of wants.
For example, the Air conditioner will be more valued in the summer season
compared to the winter season, due to the high intensity of wants of air
conditioners.
5. The utility is subjective, which means, it varies from person to
person and from place to time.
For example, some people will prefer watching movies in the theatre
compared to walking in the parks, others might prefer walking
compared to watching movies.
The utility can be cardinal, that is it can be measured in numbers
or utility can be ordinal, that is it can be ranked.
6. Components of utility?
Total Utility: It refers to the total satisfaction obtained from the consumption of
all possible units of a commodity.
Total Utility(TU) = Summation of Marginal Utility
Marginal Utility: It is the additional utility derived from the consumption of one
more unit of the given commodity.
Marginal Utility(MU) = Change in Total Utility/ Change in Units consumed
8. LAW OF DIMINISHING MARGINAL
UTILITY
This law states that as the quantity consumed of a commodity
goes on increasing , the utility derived from each successive unit
consumed goes on decreasing , consumption of all other
commodities remaining constant .
9. ASSUMPTIONS OF THE LAW
All the units of the commodity must be same in all respects.
The unit of the good must be standard.
Consumer’s taste or preference must remain same during the period of
consumption.
There must be continuity in consumption.
The mental condition of the consumer must remain normal during the period of
consumption.
10. Explanation of law
Units Consumed Total Utility(TU)
Marginal Utility(MU)
Formula used
0 0 –
1 10 10 (10-0/1-0)
2 18 8 (18-10/2-1)
3 24 6 (24-18/3-2)
4 28 4
5 30 2
6 30 0
7 28 -2 (28-30/7-6)
In order to study their relationship, we will construct an table .Where consumer
consuming apples at a point of time and we will plot TU and MU curves graphically.
12. Limitations of the law
Case of intoxicants.
(Consumption of liquor defies the law for a short period. The more a
person drinks, the more he likes it)
Application to money.
(The law equally holds good for money. It is true that more money the
man has the more greedy)
Rare collections.
(If there are only two diamonds in the world, the possession of 2nd
diamond will push up the marginal utility)
13. LAW OF EQUI-MARGINAL UTILITY
Dr. Marshall, “If a persons has a thing which he can put to several uses, he
will distribute it among these uses in such a way, that he has the same
marginal utility in all.
i.e. A consumer maximize his total utility by allocating his
income among goods and services in such a way that the
marginal utility derive from the last rupee spent on one goods
equals to the other goods
14. Importance of the law
1. Consumption
2. Production
3. Exchange
4. Price discrimination
5. Distribution
6. Public finance and International trade
7. Distribution of assets and Distribution of time Saving and investment
15. Limitations of Law of Equi-marginal
Utility
Non availability of goods
Influence of fashion, customs and habits
Tastes and preferences are not constant
Indivisibility of goods
Change in income and price
Complementary goods
Marginal utility of money does not remain constant (Inflation effect)
16. REFERENCES
Ahuja, H.L.(1970). Advanced Economic Theory. Delhi: S Chand and
Company Limited
Dwibedi, D.N. (2003). Microeconomics Theory and Applications.
Delhi: Vikas Publishing House Pvt. Ltd.
Kanel, N.R. and et.al (2016). Microeconomics. Kathmandu: Buddha
Publications
