Dr. K. Murugan Assistant Professor Department of Economics Guru Nanak College Chennai-42.

1. The Cardinal Utility Analysis
by
Dr. K. Murugan
Assistant Professor in Economics
Guru Nanak College
Chennai-42

2. Basic concepts
The Cardinal Utility Analysis
Utility concept introduced by Jermy Bentham. It is
defined as the want satisfying power of a commodity.
Marshall- utility of a commodity depends upon
person’s specific relation with the commodity.
The term cardinal utility implies that utility
measurable absolutely in terms of money or some
index called Utils.

3. • Assumptions
• 1. Rationality: The consumer is rational. His
aims at the maximization of his utility. Subject
to his income limitation.
• 2. Cardinal utility: The utility of each
commodity is measurable in terms of money.
• 3. Constant Marginal utility of money
This assumption is necessary if the monetary
unit is used as the measure of utility. The
essential features of a standard unit of
measurement is that e, it is constant.

4. • 4. Diminishing marginal utility
the utility gained from successive units of a
commodity diminishes.
5. Total utility depends upon quantitative of
individual commodities.
The total utility of a basket of goods depend
upon the quantities of the individual
commodities. It there are N commodities in
the handle with quantities X 1, X 2, Xn
The total utility is U = f ( X 1, X2, X n )

5. • Utility theory and consumer’s Equilibrium
• 1. Marginal utility
MU is defined a the increase in total utility as a
result of thee consumption of additional unit
or due to a rise in the stock of a commodity by
an additional unit.
2. Total utility It is the sum of the utility derived
from the consumption of each unit of a
commodity consumed. TU tends to rise with
the rise in consumption.

6. • 3. Average utility: It is the total utility divided
by the number of units consumed.
• TU/Q Where TU- Total utility
• Q - Number of units of commodity consumed.
• The Law of Diminishing Marginal utility
• LDMU is universal in character. It is based on
consumer behavior that more and more units
of commodity are provided to him, the utility
of additional units (MU) goes or decreasing.

7. Importance of the LDMU
It is basis of law of demand, progressive tax
policy, redistribution of wealth and the
determination of the optimum level of
consumption.
Law of Equi-marginal Utility
It states that for obtaining the maximum total
satisfaction the consumer will spend his income
on various goods and services in such a way that
the marginal rupee spent on each good gives him
the same amount of satisfaction, the MU of a unit
of money’s of all commodities are equal.
Mua/Pa = Mub/Pb= Mum
where Mu stands for marginal utility of money.

8. Indifference Curve Analysis
IC were invented by Edgeworth and later
developed by Pareto, Johnson. But , Allen and
JR Hicks has providing systematic IC.
Assumption
1. Rationality
2. utility is ordinal
3. Diminishing marginal rate of substitution
4. TU of the consumer depends on the
quantities of the commodities consumed.

9. IC locus indicating particular combination of
goods from which the consumer derives the
same level of satisfaction. As a result he is
indifferent as to the particular combination of
consumers.
U = f ( x1, x2, x3, x4) = K
Indifferent map
A set of IC called indifference, the collection
of indifference curves corresponding to
different level of satisfaction.

10. Prosperities of IC
• IC posses slope down wards from left to right.
The reason is consumer has stay at the same
level of satisfaction.
• IC are convex to the origin. It is due to the
tendency of diminishing marginal rate of
substitution.
• IC are not intersect one another. Two IC never
intersect one another, because they represent
two different sets of satisfaction.

11. Demand function
• Demand refers to the effective desire or
demand which implies that desire for a
commodities, sufficient money to purchase the
commodity and willingness to spend money to
acquires that commodity.
• Demand always refers to demand at a price.
• It always means per unit of time.