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पाठ्यक्रम

Cardinal Approach (Utility Analysis)

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Topics

  • Introduction
  • Key Concepts 
  • Consumer Equilibrium
  • Real-Life Application
  • Key Point Summary
CISCE: Class 12

Introduction

Cardinal Utility Analysis is a theory that explains how consumers decide what and how much to buy, aiming to maximise their satisfaction (utility) using their limited income. Utility is measured as numbers (1, 2, 3…), meaning the benefit or satisfaction gained from consuming goods can be quantified. This helps explain why demand rises when the price falls.

CISCE: Class 12

Key Concepts

Concept Definition Formula/Example
Utility Satisfaction gained from consuming a product Eating an apple gives you “10 utils” of utility
Total Utility (TU) Total satisfaction from all units consumed TU₃ (three bananas) = 22 utils
Marginal Utility (MU) Extra satisfaction from consuming one more unit MU₃ = TU₃ – TU₂ (22 – 18 = 4)
CISCE: Class 12

Consumer Equilibrium

  • Consumers try to get the best value for their money by balancing spending so the marginal utility per rupee spent is equal for all goods.
  • This balancing is called “equilibrium”, and it lets consumers maximise overall satisfaction.
CISCE: Class 12

Real-Life Application

Imagine eating chocolate:

  • The first chocolate gives the most joy.
  • The second and third still taste good, but they are slightly less fun.
  • By the fourth or fifth, the excitement drops—and you might not want any more.
CISCE: Class 12

Key Point Summary

  • Utility can be measured in numbers (“cardinal” units).
  • Total utility: All satisfaction from consuming a product.
  • Marginal utility: The change in satisfaction from one more unit.
  • Consumer equilibrium: Spend money so that every rupee gives the same satisfaction across products.

Test Yourself

Related QuestionsVIEW ALL [12]

Statement 1: A rational firm aims to operate in the second phase of the law of variable proportion.

Statement 2: In diminishing returns to a factor, i.e., the second phase of the law of variable proportion, MP falls.

Which of the following statement is false?

Assertion (A): TU curve starts from the origin, increases at a decreasing rate, reaches a maximum, and then starts falling.

Reason (R): The rising MU curve shows the law of diminishing marginal utility.

______ states that as more and more units of a commodity are consumed, the marginal utility derived from the additional units must decline.

Read the following passage and answer the question that follows:

The ordinal list revolution originates in the criticism of the psychological foundations of the theory of demand, namely, the principle of decreasing marginal utility as Alfred Marshall ([1890] 1898) used it. The rejection of hedonist hypotheses led Irving Fisher (1892) and Pareto (1896-97, 1900, 1909) to favour an objective or "positive" approach to economic concepts. The "ordinal list revolution" (Omarzabal 1995, 116) is grounded in a methodological transformation of economics that put the facts of objective experience as a foundation of economics and provided a research program for the ensuing years (Green and Moss 1993; Lewin 1996).
Mathematically, ordinalism is entirely based upon the idea that one can dispense with the use of a specific utility function and that no meaning shall be attached to utility measurement, except as an ordinal principle. Clearly, the development of ordinalism must be separated from the introduction of the concept of the indifference curve. Ordinalism was first advocated in Fisher's "Mathematics Investigations" (1892) and Pareto's Sunto (1900) and Manual ([1909] 1971), while the indifference curve had appeared in F. Y. Edge Worth's Mathematical Psychics (1881). It was thus only through Fisher's and Pareto's recasting that the concept of the indifference curve became irreversibly associated with the promotion of ordinalism.
Along the way, the recasting of the theory of choice along ordinal list lines raised a number of issues (about integrability, measurability, and complementarity) that would be progressively settled. The reasonable closing date for the ordinalist revolution is 1950, after Houthakker's (1950) and Samuelson's (1950) contributions.
From the late 1920s, the Paretian school was progressively gaining a larger audience while the use of the concept of marginal utility and other derivative concepts was challenged. Consequently, demand theory was recast along with the principles of individual preferences and ordinal utility functions. Nevertheless, English authors proved very silent about the meaning of indifference curves. Most if not all of the reflections after 1920 about the nature of indifference curves took place in America, mainly under the impulse of Henry Schultz at Chicago. This is an American story.

Which of the following is not the way of studying Utility?

A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of good X falls, demand for good X rises. Use Utility Analysis.

Identify the correctly matched pair of column A to that of Column B:

Column A Column B
(1) Marginal Utility (a) The power or capacity of a commodity to satisfy human wants.
(2) Cardinal measure of utility (b) The addition to total utility on consuming an additional unit of a commodity.
(3) Total Utility (c) It is the sum total of utility derived from the consumption of all units of a commodity.
(4) Utility (d) It is that measurement of utility, which is measured in terms of units.

A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of good X rises, the consumer buys less of good X. Use utility analysis.

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