Cardinal Utility Analysis
Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumers demand a product and derives the law of demand which establishes an inverse relationship between price and quality demand of a product.
Consumer
To analyze the behavior of the consumer, the consumer should have the following qualification:
a.Rational
The consumer should be able to identify the thing what is good and what is bad.
b. Limited Income
Which limits on the extent to which he can satisfy his wants.
c. Utility Maximizer
A consumer should be a utility maximizer from the commodity, which he wants to consume.
d. Information
They should have full information and knowledge about consuming goods.
Utility
The utility is the ability of a commodity to satisfy a want.
Types of Utility
There are two types of utility:
1. Total Utility
Total utility refers to the total satisfaction from the amount of that product consumed. In other words, the total utility is the aggregate of marginal utilities.
Mathematically,
TU = ∑MU
TU = MU1+ MU2+………+MUn
where,
TU= Total Utility
MU1 = Marginal utility derived from 1st unit
MU2 = Marginal utility derived from 2nd unit
MUn = Marginal utility derived from the nth unit
2. Marginal Utility
It refers to the change in satisfaction resulting from consuming a little more or less of that product. Marginal utility is the extra satisfaction received from consuming an additional unit of a commodity.
Symbolically,
MU = ΔTU/ΔQ
Where,
Δ=Change
TU = Total Utility
Q = Total consuming unit
There are three types of marginal utility:
1. Positive Utility
When the total utility increased with the consumption of additional units of the commodity, then the marginal utility derives in a positive from even if it is decreasing.
2. Zero Utility
It is defined as no total utility by the consumption of an additional unit.
3. Negative Utility
When the total utility decreases with each successive unit of the commodity, the marginal utility becomes negative.
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