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Saturday, January 11, 2014

Concept Of Cardinal Utility Analysis And Its Assumptions

Concept Of Cardinal Utility Analysis

Cardinal utility analysis is based on the cardinal measurement of utility which assumes that utility is measurable and additive. This theory was developed by neo-classical economists like Marshall, Pigou, Robertson etc. It is expressed as a quantity measured in hypothetical units which called utils. If a consumer imagines that one mango has 8 utils and an apple 4 utils, it implies that the utility of mango is twice than of an apple.

Assumptions Of Cardinal Utility Analysis

1. Rationality

The consumer is assumed to the rational. He tries to maximize his total utility under the income constraint.

2. Cardinal Utility

The utility of each commodity is measurable. Utility is cardinal concept. The most convenient measure is money. Thus utility can be measured quantitatively in monetary units or cardinal units.

3. Constant Marginal Utility Of Money

The utility derived from commodities are measured in terms of money. So, money is a unit of measurement in cardinal approach. Hence, marginal utility of money should be constant.

4. Diminishing Marginal Utility

If the stock of commodities increases with the consumer, each additional stock or unit of the commodity gives him less and less satisfaction. It means utility increases at a decreasing rate.

5. Independent Utilities

It means utility obtained from commodity X is not dependent on utility obtained from commodity Y. It does not affected by the consumption of other commodities.