Chapter 2 - Consumer's equilibrium : Cardinal Approach

In this post, we will see how consumers decide which commodity should he purchase and the quantity to be purchased. Consumer's decision of consumption always depends upon utility and price of the commodity.

Utility: Utility refers to wants satisfying power of a commodity. For example if a consumer is feeling hungry, then a Burger has the power to satisfy his hunger. This power of Burger to satisfy human want is Utility. Utility depends upon the intensity of want of the consumer. Higher the intensity of want higher the Utility.

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But is utility is measurable or not? There are two different approaches on this issue.

Ordinal approach This approach was propounded by Allen and Hicks. According to Allen and Hicks utility can't be measured but can be ranked.

Cardinal approach: This approach was propounded by Alfred Marshall. According to Alfred Marshall utility is measurable with the measuring rod of money.

Cardinal approach : Cardinal approach defines utility as the maximum amount of money that a consumer is ready to pay to purchase an unit of a commodity. Utility is measured on the basis of money but unit of measurement is UTILS. Cardinal approach is also known as marginal utility analysis.

According to cardinal approach there are two parameters for the measurement of utility.

Total Utility (TU): Overall satisfaction gained by consuming all the given units of a commodity is known as total utility.

Marginal Utility (MU): Net change In total utility when one more unit Is consumed Is known as marginal utility.

For example if a consumer gets 100 utils by consuming one slice of pizza and 180 utils by consuming two slice of pizza then total utility of first and second slice of pizza is 100 utils and 180 utils respectively whereas marginal utility is 100 utils from the first slice of pizza and 80 utils (180-100) from the second slice of pizza.