Lecture: CARDINAL UTILITY ANALYSIS (Marshallian Utility Analysis-One Commodity case)

The goods satisfy human wants. This want satisfying quality in a good is called Utility. Utility is
that quality in a commodity by virtue of which it is capable of satisfying a human want. Air,
water (free goods) and food, cloth etc. (economic goods) satisfies people’s wants and hence
they possess utility. In winter ,taste of Tea, Coffee ,Hot flavored Milk and in Summer ,Cold
coffee, cold drinks ,juices, butter milk ,ice cream etc. and their utility and high satisfaction in
season.

Total Utility (TU):

Total utility refers to the total satisfaction obtained from the consumption of all possible units of a
commodity. It measures the total satisfaction obtained from consumption of all the units of that good.
For example, if the 1st ice-cream gives you a satisfaction of 20 utils and 2 ndone gives 16 utils, then TU
from 2 ice-creams is 20 + 16 = 36 utils. If the 3 rd ice-cream generates satisfaction of 10 utils, then TU
from 3 ice-creams will be 20+ 16 + 10 = 46 utils.

TU can be calculated as:

TUn = U1 + U2 + U3 +……………………. + Un

Where:

TUn = Total utility from n units of a given commodity

U1, U2, U3,…………….Un = Utility from the 1st, 2nd, 3rd nth unit

n = Number of units consumed

Marginal Utility (MU):

Marginal utility is the additional utility derived from the consumption of one more unit of the given
commodity. It is the utility derived from the last unit of a commodity purchased. As per given
example, when 3rd ice-cream is consumed, TU increases from 36 utils to 46 utils. The additional 10
utils from the 3rd ice-cream is the MU.

In the words of Chapman, “Marginal utility is addition made to total utility by consuming one more
unit of a commodity”.

MU can be calculated as: MUn = TUn – TUn-1

Where: MUn = Marginal utility from nth unit; TUn = Total utility from n units;

TUn-1 = Total utility from n – 1 units; n = Number of units of consumption

MU of 3rd ice-cream will be: MU3 = TU3 – TU2 = 46 – 36 = 10 utils One More way to Calculate MU

MU is the change in TU when one more unit is consumed. However, when change in units consumed
is more than one, then MU can also be calculated as:

ATU

MU = Change in Total Utility/ Change in number of units = ∆TU/∆Q

INITIAL UTILITY

Initial utility is the utility derived from the consumption of the first unit of a commodity.

Relation between Total Utility and Marginal Utility:

There is a close relationship between Total Utility and Marginal Utility. As there is increase in the unit
of a particular commodity, the Marginal Utility goes on diminishing and Total Utility goes on
increasing. Total Utility goes on increasing up to that extent till the Marginal Utility becomes Zero.
When Marginal Utility is zero Total Utility is maximum

CARDINAL UTILITY

The Cardinal Utility approach is propounded by neo-classical economists, who believe

that utility is measurable, and the customer can express his satisfaction in cardinal or
quantitative numbers, such as 1,2,3, and so on.

ASSUMPTIONS

Rationality: It is assumed that the consumers are rational, and they satisfy their wants
in the order of their preference. This means they will purchase those commodities first
which yields the highest utility and then the second highest and so on.

Limited Resources (Money): The consumer has limited money to spend on the

purchase of goods and services and thus this makes the consumer buy those
commodities first which is a necessity.

Maximize Satisfaction: Every consumer aims at maximizing his/her satisfaction for the

amount of money he/she spends on the goods and services.
Utility is cardinally Measurable: It is assumed that the utility is measurable, and the
utility derived from one unit of the commodity is equal to the amount of money, which a
consumer is ready to pay for it, i.e. 1 Util = 1 unit of money.

Diminishing Marginal Utility: This means, with the increased consumption of a

commodity, the utility derived from each successive unit goes on diminishing. This law
holds true for the theory of consumer behavior.

Marginal Utility of Money is Constant: It is assumed that the marginal utility of

money remains constant irrespective of the level of a consumer’s income.

Utility is Additive: The cardinalists believe that not only the utility is measurable but
also the utility derived from the consumption of different commodities are added up to
realize the total utility.

Law of Diminishing Marginal Utility 

Marshall’s theory explain with the help of an example. Assume that a consumer consumes 6 apples
one after another. The first apple gives him 20 utils (units for measuring utility). When he consumes
the second and third apple, the marginal utility of each additional apple will be lesser. This is because
with an increase in the consumption of apples, his desire to consume more apples falls.

Therefore, this example proves the point that every successive unit of a commodity used gives the
utility with the diminishing rate.

Schedule for Law of Diminishing Marginal Utility:

Unit of Consumption Marginal Utility Total Utility

1 20 20

2 15 35

3 10 45

4 05 50

5 00 50

6 -05 45

The schedule explains that with each additional unit consumed the marginal utility increases with a
diminishing rate. After the saturation point though, the utility starts to fall.

The total utility obtained from the first apple is 20 utils, which keep on increasing until we reach our
saturation point at 5th apple. On the other hand, marginal utility keeps on diminishing with every
additional apple consumed. When we consumed the 6 th apple, we have gone over the limit. Hence,
the marginal utility is negative and the total utility falls.

With the help of the schedule, we have made the following diagram:

Saturation Point: The point where the desire to consume the same product anymore becomes zero.

Disutility: If you still consume the product after the saturation point, the total utility starts to fall. This
is known as disutility.

When the first apple is consumed, the marginal utility is 20. When the second apple is consumed, the
marginal utility increases by 15 utils, which is less than the marginal utility of the 1 st apple – because
of the diminishing rate. Therefore, we have shown that the utility of apples consumed diminishes with
every increase of apple consumed.

Similarly, when we consumed the 5 th apple, we are at our saturation point. If we consume another
apple, i.e. 6th apple, we can see that the marginal utility curve has fallen to below X-axis, which is also
known as ‘disutility’.

Criticism of the Law of Diminishing Marginal Utility

 Utility is Relative. The law of Diminishing Marginal Utility is based on the assumption of
independence of utilities, i.e., the utility which a consumer derives from a commodity depends on the
quantity of that commodity only. In this world, where quantity of one commodity bought depends not
only on its own quantity and price but also on the quantities and prices of other commodities needed.
It is hardly real to say that the desire to have still more of a particular commodity, as we have more
and more of it, is simply the result of its own influence on satisfactions. In this view utility is relative
and not independent as the law of Diminishing Marginal Utility assumes.

2. Utility is Immeasurable. One of the pivotal assumptions of the law of Diminishing Marginal Utility
is that utility is measurable. In other words, it is assumed that it is possible to express the utility or
satisfaction which a person derives from a good in quantitative terms. Accordingly, a person can say
that he gets utility equal to 15 units from the consumption of the first unit of a commodity and 10 units
from the second unit of it, and so on. But it has been contended by modern economists that utility
relates to the state of mind of an individual. Thus it is a subjective concept and is incapable of being
measured quantitatively.

3. Marginal Utility of Money Variable. Another pillar on which the law of Diminishing Marginal Utility
stands is that the marginal utility of money is constant. Thus the law assumes that while the marginal
utilities of commodities diminish as more and more of them are consumed, the marginal utility of
money remains constant throughout the process of consumption. But this is contrary to what happens
actually. As more and more is spent on the purchase of a commodity, and less and less of money is
left with the purchase, the marginal utility of money goes on increasing. Thus the init of measurement
itself is variable. In this context it is fallacious to use money as the measuring rod of utility.

4. The law of Diminishing Marginal Utility is not universally applicable. The law does not apply
to all types of commodities and persons. A drunkard gets more satisfaction on taking ‘successive’
cups of wine. Greed increase with more money (with some people).

5.Unrealistic Assumptions:

Marshall’s utility analysis is based on some unrealistic assumptions. For instance,

Marshall assumed that utility derived from a commodity can be measured in cardinal
numbers. But, modern economists like J. R. Hicks and R. G. D. Allen had suggested
that utility, being a psychological concept, can never be measured in cardinal numbers.
6 .MU of Money Can Never be Constant:

Marshall’s assumption of constant marginal utility of money is another unrealistic

assumption. And this is the most crucial assumption of the utility theory. According to
Marshall, utility from a good can be measured in terms of money.
7.No Formal Distinction between Income and Substitution 

Because of the constancy in the marginal utility of money, Marshall could not
distinguish between income effect and substitution effect of a price change. We know
that a change in the price of a commodity results in two types of changes—one is the
income effect and another is the substitution effect. Marshall considered only the
substitution effect and ignored the income effect.

Important Practical Importance of Law of Diminishing Marginal Utility

1. Basis of Economic Laws:

The Law of Diminishing Marginal Utility is the basic law of consumption. The
Law of Demand, the Law of Equi-marginal Utility, and the Concept of
Consumer’s Surplus are based on it.
2. Diversification in Consumption and Production:
The changes in design, pattern and packing of commodities very often brought
about by producers are in keeping with this law. We know that the use of the
same good makes us feel bored; its utility diminishes in our estimation. We want
variety in soaps, toothpastes, pens, etc. Thus, this law helps in bringing variety in
consumption and production.
3. Value Theory:
The law helps to explain the phenomenon in value theory that the price of a
commodity falls when its supply increases. It is because with the increase in the
stock of a commodity, its marginal utility diminishes.
4. Diamond-Water Paradox:
The famous “diamond-water paradox” of Smith can be explained with the help of
this law. Because of their relative scarcity, diamonds possess high marginal utility
and so a high price. Since water is relatively abundant, it possesses low marginal
utility and hence low price even though its total utility is high. That is why water
has low price as compared to a diamond though it is more useful than the latter.
5. Progressive Taxation:
The principle of progression in taxation is also based on this law. As a person’s
income increases, the rate of tax rises because the marginal utility of money to
him falls with the rise in his income.
6. Basis of Socialism:
This law underlie the socialist plea for an equitable distribution of wealth. The
marginal utility of money to the rich is low. It is, therefore, advisable that their
surplus wealth be acquired by the state and distributed to the poor who possess
high marginal utility for money.
7.For Producer:
This law helps the producer in increasing sales. The producer reduces the price of
the product for the purpose of increasing sales. The consumers purchase more
quantity of that product to obtain maximum satisfaction given their income. As
they buy more quantities the marginal utility of the last rupee diminishes. Thus,
the sale of the product increases.