Cardinal Utility Approaches to study the consumer behavior

Cardinal Utility • Approaches to study the consumer behavior. • How do consumers behave? Purchase less at a higher price & more at a lower price. • Why do they behave like this? Cardinal utility approach attempts to find the answer to this using the concept of utility. • Utility is the want in satisfying power of a commodity. Eg. Wants to consume apple not banana. Therefore he will consume only apple and not banana. 1

Cardinal Utility • Therefore utility is a subjective concept. • Therefore utility cannot be measured. However cardinal analysis suggests a technique to measure utility. It is non other than the amount of money the consumer is willing to pay is equal to the utility he gains by consuming that particular commodity. Eg. If a consumer is willing to pay Rs. 20, per unit then the utility will be equal to 20 units. • There are two important related concepts in utility. 2

Limitation of diminishing marginal utility: • Income, taste and habit: When income , taste and habit is changed then at that time consumer can get more satisfaction from additional unit. • Time period: If there is very long time period interval between the consumption of different units of commodity at that time consumer may get more satisfaction from additional units. • Rare collection: In the case of rare collection this law is not applicable because if a person has hobby to collect rare items like old stamp, coin, painting, etc. then he/she gets more satisfaction from the collection of more commodity.

• • Limitation of diminishing marginal utility: Durable/ Individual goods: In the case of this goods this law is not applicable because consumer purchase this goo once at a time personal use, as a result we can’t compare the marginal utility of different items. Abnormal man: In the case of abnormal man this law is not applicable for example druggist, drunker, gambler, mad man, etc. get more satisfaction from the consumption of last unit. M. U of money remains constant: When one have high money its value is low but when there is less money its value is high but economics says that marginal utility of money remains constant so this law is not applicable. Utility can’t be measured in numbers: Utility is to be measured in rank i. e. high, low, satisfaction but can’t be expressed in numbers.

Limitation of diminishing marginal utility: • Complements and substitutes • The Marshallian utility theory ignores complements and substitutes of the commodity under consideration. The theory states that no complement or substitute of a commodity influences the utility derived from it. However, in real life, there are various complements and substitutes for a commodity. Hence, the utility derived from the commodity under consideration is subject to all those goods. For instance, the utility derived from a car depends upon fuel price also • Rationality • The theory assumes that the consumer is rational. However, various factors such as advertisement and ignorance can influence the consumer’s decision.

Limitation of diminishing marginal utility: • Homogenous Goods ( identical goods) should be in existence to operate the diminishing MU • Standard units of consumption should operate (reasonable units) • Continuous consumption should be there. • Fails in the case of prestigious goods. • In the case of related goods; In the absence of complementary & substitute goods the law will not operate.