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Assignment on Microeconomics (ECN 201)

Submitted by

BERNARD OKPE
Reg. No./Group/Level:

Department/Faculty: Economics & Social Sciences, University of Abuja, Nigeria

Question: The Cardinalist and Ordinalist Approaches of the Consumer’s


Behaviour rest at the same poll Discuss.

The knowledge of microeconomics made us to under stand that there are three decision making units in
economics and they are: households/consumer (the primary consuming units), firms (the primary
producing units) and government.

The above question tries to bring to the mind of Economist students the issue and argument between
“Cardinalist approaches and Ordinalist approaches of measuring utility and how they square-up to
address the issue of consumer behaviour(utility)” under the economics unit of household/consumer.
But, before discussing this assertion, it is however, important to accurately know the follows key words
that involved in the discussion.

 Theory of consumer behaviour

 A consumer
 Utility

The central concepts by the question will also be discussed. They include;

 Approaches to Consumer Behaviour/Methods of comparing Utility

 Cardinalist approaches and


 Ordinalist approaches

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What is the theory of consumer behaviour

Before looking at what the theory of consumer behavior is all about, let’s first see what a consumer is.

Consumer

A consumer is an individual or a household who uses/consumes final goods and services with a primary
objective of maximizing utility.

Theory of Consumer behaviour/Consumer behaviour

In microeconomic theory, consumer behaviour is addressed within the concepts of consumer preference
and consumer surplus. Consumers' surplus is the excess amount a consumer is willing to pay for a
good, as opposed to doing without it, over the amount actually paid for the good. A consumers' surplus
can exist only within the context of the concept of diminishing marginal utility. This concept holds that,
at some point, consumption of additional incremental quantities of a good will yield successively
smaller increases in utility. Thus, it is assumed that an individual will be willing to pay more for the first
unit of consumption than for a unit consumed at some point further along. If the actual price paid for a
good is assumed to be its marginal price, then the sum of the differences between that price and the
prices than one would be willing to pay for earlier units in the consumption chain (assuming a limitation
on supply which would cause prices for earlier consumption to be.

In microeconomics, preferences of consumers and other entities are modelled with preference relations.
Let S be the set of all "packages" of goods and services (or more generally "possible worlds"). Then ≤ is
a preference relation on S if it is a binary relation on S such that a ≤ b if and only if b is at least as
preferable as a. It is conventional to say "b is weakly preferred to a", or just "b is preferred to a". If a ≤
b but not b ≤ a, then the consumer strictly prefers b to a, which is written a < b. If a ≤ b and b ≤ a then
the consumer is indifferent between a and b.

Therefore, the theory of consumer behaviour is a description of how consumers allocate income among
different goods and services to maximize their well-being. It answers the question: “How can a
consumer with a limited income decide which goods and services to buy with the objective of
maximizing their utility?” It deals with how consumers allocate their income across various goods and

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services and explain how these allocation decisions determine the demands for the various goods and
services.

Under the theory of consumer behaviour, the following important assumptions are made:

1. The consumer is assumed to be rational. Given his/her income and the market prices of the
commodities, he/she spends his/her income on the basket of goods and services that give the
highest possible satisfaction or utility. This is the axiom/postulate of utility maximization. i.e. the
behaviour of the consumer under the condition of certain information (Choice under
certainty)
2. It is also assumed that the consumer has all relevant information important for his/her decision.
This means that the consumer has perfect knowledge about his/her income, complete knowledge
of the available commodities in the market, and exact knowledge of the prices of all available
commodities in the market. i.e. choice under uncertainty.

Utility

Utility, a want satisfying power of a good or service or the satisfaction or pleasure a consumer obtains
from the consumption of a good or service, is subjective and difficult to measure. Utility is simply an
abstraction useful for explaining Consumer Behaviour. The theory attempts to explain how an individual
consumer could maximize his satisfaction from his limited income given the market prices of goods and
services. In simple words the theory tries to address how an individual consumer given the market prices
of goods and services can behave rationally by ensuring that he purchases more of the commodity at
lower price and purchases less of the commodity at a higher price. To properly understand the concept
of utility it is important to understand the forms of utility. There are three forms of utility namely;
Marginal Utility, Average Utility and Total Utility.

1. Marginal Utility is the addition to the overall utility resulting from one or a unit change in the
2. additional unit of a commodity. It should also be known that additional satisfaction from the
continuous consumption of a commodity would tend to fall with each successive unit consumed.
For example, after a hard day’s job on a sunny day, a tired farmer will quickly drink the first
glass of water offered him. Successive glasses of water may be taken but not with the enthusiasm
associated with the first glass of water. This is what is known as THE AXIOM OF

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DIMINISHING MARGINAL UTILITY. Mathematically Marginal Utility is defined as the change
in Total Utility over the change in Quantity consumed. That is, [MUx = ΔTUx/ ΔQx]
3. Average Utility is the utility per unit of the quantity of a commodity consumed. It is therefore
the ratio of total utility to that of the quantity consumed. For this reason Average utility would
fall but would never be zero. It is mathematically represented as: [AUx = TUx/ Qx]
4. Total Utility is the sum of marginal utilities. It is the overall satisfaction from consuming a
bundle of commodity. In other words it is the entire amount of satisfaction that the consumer
derives from consuming more or successive units of a particular commodity- this is in the case of
one commodity. The axiom of diminishing marginal utility does not affect total utility. This is
because an additional unit of a commodity tends to increase its overall satisfaction. It is
mathematically represented as: [TUx = ΣMUx]

Approaches to Consumer Behavior/Methods of comparing Utility

(Cardinalist approaches and Ordinalist approaches)

The classical and neo-classical Economists square up with two approaches and assumed that a
consumer is rational. He is well aware of with his income and the prices of the goods prevailing in the
market and in such state of affairs the consumer wants to maximize his utility (satisfaction). Utility
theory, over the last generation, has been split into two warring camps:

1. Those who cling to the old concept of cardinal, measurable utility known as Cardinal
Approaches
2. And those who have thrown over the cardinal concept but have dispensed with the utility concept
as well and have substituted an analysis based on indifference curves known Ordinal
Approaches.

The Cardinal Utility Theory

There are some theories of utility that attach significance to the magnitude of utility. These are known
as Cardinal Utility Theories.

The Cardinalist school postulates that utility can be measured. The advocates of this school have given
various suggestions for the measurement of utility. With theassumption of complete knowledge of

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market conditions and income levels over the planning period i.e. under certainty, some economists have
suggested that utility can be measured in monetary units, say, by the amount of money the consumer is
willing to sacrifice for another unit of a commodity. And others suggested the measurement of utility in
subjective units, called Utils.

Thus, in a theory of cardinal utility, the size of the utility difference between two bundles of goods and
services is supposed to have some sort of significance.

In its attempt to reach at the equilibrium of the consumer, the cardinal utility approach makes the
following assumptions.

Assumptions of the Cardinal Utility Theory

1. Rationality: The consumer is rational. He/she aims at the maximization of his/her utility subject to
the constraint imposed by his/her given income. This means that the consumer is able to allocate his/her
limited income first on the good that gives him/her the highest possible level of satisfaction, and then
move to the next best, and so on.

2. Cardinal Utility: The utility of each commodity is measurable. It is assumed that utility is a cardinal
concept. The most convenient measure of utility is money: the utility is measured by the monetary units
that the consumer is willing to pay for another unit of the commodity.

3. Constant Marginal Utility of Money: This assumption is necessary if the monetary unit is used as
the measure of utility. The essential feature of a standard unit of measurement is that it is constant. If the
marginal utility of money changes as income changes (increase or decrease) the measuring rod for utility
becomes, like an elastic ruler, inappropriate for measurement.

4. Diminishing Marginal Utility of Commodities: The utility gained from successive units of a
commodity diminishes. In other words, the marginal utility of acommodity diminishes as the consumer
consumes larger quantities of it. This is what is referred to as the axiom of diminishing marginal utility.