1st year

1st semester
2nd assignment

Lecture name: prof.N.D Smarawickrema

Reg No: A/12/BBA/066
Discussion Group: B
Date:

Cardinal Utility Approach

The cardinal approach is a consumer view on utility. This economic approach
asks the consumer which utility the consumer receives from purchasing a
certain good or service. According to this approach, utility is measurable and
can be expressed in quantitative term. Cardinal utility approach is also knows
as classical approach because it was presented by classical economists.

Theories based on Cardinal Utility Approach

There are two important laws to explain consumers behavior based on the cardinal utility
approach. They are the following:

The Law of Diminishing Marginal Utility or Gossen's First Law

The Law of Equi-Marginal Utility or Gossens Second Law

ASSUMPTIONS OF THE CARDINAL UTILITY APPROACH

The principle of cardinal utility is based on following assumptions.
1. Utility is Measurable
Utility is measured based on the amount of money that a customer is willing
to pay for the particular commodity.
2. Marginal Utility of Money is Constant
This means that money must measure the same amount of utility in all
circumstances. In other words, the utility derived from each unit of money is
constant. This is necessary because money is used to measure utility of a
commodity.
3. Utilities are Independent
A customers basket does not contain goods that are substitutes or
complements.
Therefore, TU =U1(X1) +U2(X2)+ Un(Xn)

4. Diminishing Marginal Utility

The marginal utility of a commodity diminishes as a person consumes more
and more quantities of it.
MUX = f(Qx)
The equation states that marginal utility of a commodity X(MUX)is a function
of the quantity of a X(QX). The greater the quantity, the lesser is its marginal
utility.
5. Rationality
The cardinal utility approach assumes that the consumer is rational. This
means that the consumer tries to maximize his or her utility with given
income.

Derivation of demand curve according to cardinal approach.

Quantity
0

1
2
3
4
5
6
7
8

Total
utility
0
12
22
30
36
40
41
39
34

Marginal
utility
12
10
8
6
4
1
-2
-5

Marginal Utility=TU/Q

From the Total utility Curve,we can derive the Marginal utility curve.It is the demand
curve that derives from cardinal approach.

MU=D

Total utility
45
40
35
30

Total utility

25
20
15
10
5
0
1

Marginal utility
14
12
10
8

Marginal utility

6
4
2
0
-2 1
-4
-6