BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

CONSUMER BEHAVIOUR
Measurement of Utility
Two approaches to utility analysis:
(1) Cardinal approach to utility.
(2) Ordinal approach to utility.
Utility is the satisfaction derived from consuming a certain product.
CARDINAL APPROACH TO UTILITY
Marshall and other neo-classical economists have developed and advocated this approach to
utility. Money is the measuring rod of utility. The method of measuring utility in terms of
numbers is called cardinal approach. We can measure the utility in terms of money. Utility
can be added, subtracted and multiplied with the help of this method in cardinal nos. like
1,2,3,4 and so on.

ORDINAL APPROACH TO UTILITY

According to ordinal economists like J.R. Hicks, R.G.D. Allen, F.Y. Edgeworth and Vilfredo
pareto. Utility is not cardinally measurable and it can be measured in ordinal numbers like
I,II,III and so on. These economists put forward the following arguments against the cardinal
measurement of utility.
(i) Utility is a psychological & subjective concept which cannot be measured.
(ii) The mental state and attitude of each individual go under change frequently. Hence,
Utility is not measurable and pointed by modern economists.
(iii) The measuring rod of utility, as put forward by Prof. Alfred Marshall is money which is
not a stable and exact measurement as we find in case of natural & physical sciences.
MARGINAL UTILITY ANALYSIS
This theory which is formulated by Alfred Marshall, a British economist, seeks to explain
how a consumer spends his income on different goods and services so as to attain maximum
satisfaction. This theory is based on certain assumptions.
Assumptions of Marginal Utility Analysis
1. Rationality: A consumer is rational and attempts to attain maximum satisfaction from
his limited money income.
2. Cardinal Measurability of Utility:

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

 According to neoclassical economists, utility is a cardinal concept i.e., utility is a

measurable and quantifiable entity. It implies that utility can be measured in cardinal
numbers and assigned a cardinal number like 1, 2, 3 etc.
 Marshall and some other economists used a psychological unit of measurement of
utility called utils. Thus, a person can say that he derives utility equal to 10 utils from
the consumption of 1 unit of commodity A and 5 from the consumption of 1 unit of
commodity B. Since a consumer can quantitatively express his utility, he can easily
compare different commodities and express which commodity gives him greater
utility and by how much. Utilities from different units of the commodity can be added
as well.
 According to this theory, money is the measuring rod of utility. The amount of money
which a person is prepared to pay for a unit of a good, rather than go without it, is a
measure of the utility which he derives from the good.
3. Constancy of the Marginal Utility of Money: The marginal utility of money
remains constant throughout when the individual is spending money on a good. This
assumption, although not realistic, has been made in order to facilitate the
measurement of utility of commodities in terms of money. If the marginal utility of
money changes as income changes, the measuring-rod of utility becomes unstable and
therefore would be inappropriate for measurement.
4. Diminishing Marginal Utility - The marginal utility derived from a commodity
diminishes as its consumption increases. This means that the more a particular good is
consumed, the less the additional satisfaction derived.

TOTAL UTILITY AND MARGINAL UTILITY

Total utility (TU)-is the total satisfaction a person gains from all those units of a commodity
consumed within a given time period. Thus if an individual drank 10 cups of tea a day, her
daily total utility from tea would be the satisfaction derived from those 10 cups.
Total utility is the sum of marginal utilities derived from the consumption of different units
i.e. TU= MU1+MU2+.....+MUn Where MU1, MU2,.....,MUn etc are marginal utilities of the
successive units of a commodity

Marginal Utility-is defined as the change in the total utility due to a unit change in the
consumption of a commodity per unit of time. It can also be defined as the addition made to

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

the total utility by consuming an additional unit of a commodity. For example, if total utility
of 3 cups of tea is
18 utils and on consuming the 4th cup it rises to 20; then marginal utility 20-18 = 2 utils.
Thus, by consuming one more cup of tea, the additional utility, a consumer gets is 2 utils.
Marginal utility can be expressed as, MU =Δ TU/ΔQ

Where MU = marginal utility; ΔΤU = change in total utility; ΔQ = change in the quantity
consumed. ‘Utils’ is the term used by Marshall as a measuring unit of utility. The following
expression can also be used to find marginal utility: MU = TUn – TUn-1
Where, TUn is the total utility of nth unit of the commodity and TUn-1 utility from the n-1th
commodity. Thus, if TU from the second unit (nth unit) of apple is 13 and TU from the
previous unit (n-1) is 7, then MU is 13 – 7 = 6.
Relationship between Total Utility and Marginal Utility:
Marginal utility derived from various units of a commodity and its total utility are
interrelated. This can be easily followed from the hypothetical example given in the table
below
Utility Schedule
Units of x Total utility Marginal utility

1 10 10

2 18 8

3 24 6

4 28 4

5 30 2

6 30 0

7 28 –2

The above table can be shown by the following graph

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

 In this graph the curve MU is Marginal Utility curve. It has a negative slope denoting
the fact that as the quantity of a commodity increase, marginal utility decreases. At Q
it is zero and after it, it becomes negative.
 Total utility and marginal utility of the very first unit of x consumed, are the same. As
the consumer consumes further units of x, the total utility increases at a diminishing
rate and marginal utility goes on diminishing. (TU MU).
 At a particular stage, total utility reaches to its maximum and remains constant whereas
marginal utility becomes zero. This is called the point of satiety. (TU highest, MU = 0).
After this point, any additional unit consumed further results in a decline in the total
utility, while marginal utility becomes negative. (TU MU negative).
 After reaching the point of satiety, a rational consumer should stop his consumption
since the maximum limit of satisfaction is reached and there is no addition to total utility
by any further increase in the stock of a commodity. Consumption beyond the point of
satiety transforms satisfaction into dissatisfaction. In other words, a consumer starts
experiencing ill effects of consumption.
LAW OF DIMINISHING MARGINAL UTILITY
According to Prof. Alfred Marshall, “Other things remaining constant, the additional benefit
which a person derives from a given increase in his stock of a thing, diminishes with every
increase in the stock that he already has.” In other words, marginal utility that any consumer
derives from successive units of a particular commodity goes on diminishing as his or her total
consumption of that commodity increases. In short, the more of a thing you have, the less you
want to have more of it.
The Law is based upon certain assumptions
 Consumer is assumed to be rational. It means that his behaviour is normal and he tries
to maximize his satisfaction.
 Price of the commodity and its related goods remains constant.

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

 Different units consumed should be identical in all respects.

 Consumer’s habit taste, preference remain unchanged.
 There should be no time gap or interval between the consumption of one unit and
another unit.
 Different units consumed should consist of standard units which are not too small or
large in size.
 Utility can be cardinally or numerically measured. Hence, mathematical operations are
easily possible to know and compare the utility derived from each unit of a commodity.
The table and diagram below explains the Law of Diminishing Marginal Utility
Units of x Marginal Utility (MU)
1 10
2 8
3 6
4 4
5 2
6 0
7 –2
The table shows that marginal utility keeps on diminishing with increase in consumption,
further it becomes zero and then negative.

In the above diagram, units of commodity x are measured on X axis and marginal utility is
measured on Y axis. Various points of MU are plotted on the graph as per the given schedule.
When the locus of all the points is joined, MU curve is derived. MU curve slopes downwards
from left to right which shows that MU goes on diminishing with every successive increase in

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

the consumption of a commodity. When MU becomes zero, MU curve intercepts the X axis.
Further consumption of a commodity brings disutility (negative utility) which is shown by the
shaded portion in the diagram.
The diminishing marginal utility curve applies to almost all commodities. A few exceptions
however, have been pointed out by some economists. According to them, this law does not
apply to;
 Hobbies: In certain hobbies like collection of various old notes and coins, rare
paintings, music, reading etc., the law does not hold true because every additional
increase in the stock gives more pleasure. This increases marginal utility. However, this
violates the assumption of homogeneity and continuity.
 Addictions: It is observed in case of a drunkard that the level of intoxication increases
with every additional unit of liquor consumed. So MU received by drunkard may
increase. Actually it is only an illusion. This condition is similar to almost all
addictions. However, this violates the assumption of rationality.
 Power: This is an exception to the law because when a person acquires power, his lust
for power increases. He desires to have more and more of it. However, this again
violates the rationality assumption.
 Money: It is said that the MU of money never becomes zero. It increases when the
stock of money increases. This is because money is a medium of exchange which is
used to satisfy various wants. However, according to some economists, this law is
applicable to money too. For example, marginal utility of money is more to a poor
person than to a rich person.
However, these, exceptions are only apparent. Since they violate some or the other assumptions
of the law and hence, they are not real exceptions.
Equilibrium of the consumer under the cardinalist approach/method
 The Law of diminishing marginal utility helps us to understand how a consumer reaches
equilibrium in case of a single product. It states that as the quantity of a good with the
consumer increases, marginal utility of the good decreases. In other words, the marginal
utility curve is downward sloping. Now, a consumer will go on buying a good till the
marginal utility of the good becomes equal to the market price. In other words, the
consumer will be in equilibrium (will be deriving maximum satisfaction) in respect of
the quantity of the good when marginal utility of the good is equal to its price (𝑴𝑼𝒙=
𝑷𝒙). Here his satisfaction will be maximum.
 If 𝑴𝑼𝒙> 𝑷𝒙 the consumer should buy more of X to derive additional satisfaction. If
𝑴𝑼𝒙< 𝑷𝒙 the consumer should reduce the consumption of X to increase satisfaction.
𝑴𝑼𝒙= 𝑷𝒙 is the point of consumer equilibrium, though it is very difficult to attain but
at this point the consumer achieves maximum utility.
 What happens when there is a change in the price of the good? The equality between
marginal utility and price is disturbed when the price of the good falls. The consumer
will consume more of the good so as to restore the equality between the marginal utility
and price. The marginal utility from the good will fall when he consumes more of the
good. He will continue consuming more till the marginal utility becomes equal to the
new lower price. On the other hand, when price of the good increases, he will buy less

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

so as to equate the marginal utility to the higher price. We can say that the downward
sloping demand curve is directly derived from the marginal utility curve.
The optimum combination of goods consumed
 The above analysis is basically for only one commodity. When a consumer consumes
more than one good for example good X and good Y, the consumer will obtain his
equilibrium when there is equality between the ratios of the marginal utility of each
good to its price.
 We can use marginal utility analysis to show how a rational person decides what
combination of goods to buy. The rule for rational consumer behaviour is known as the
equi-marginal principle. This states that a consumer will get the highest total utility
from a given level of income when the ratio of the marginal utilities is equal to the ratio
of the prices.
 According to equi-marginal principle, the consumer is said to be at equilibrium, when
the following condition is met: MUx/Px = MUy/Py or MUx / MUy = Px /Py
 A change in the price of any of the goods will cause a change in a person‘s spending
patterns. From the above principle, the value of the expression 𝑴𝑼𝑿𝑷𝑿 will now fall
as the price of x is increased so the 𝑴𝑼𝒙 per dollar spent will now be less than any
other good. The consumer will therefore increase TU by spending less on good X and
more on all other goods. In other words the consumer only maximizes TU by buying
less of good X. The conclusion is that the demand curve is downward sloping.
Example of how the equilibrium is established
Suppose there are two commodity X and Y. Price of Good X = $2 per unit and Price of Good
Y = $3per unit. Consumers money income = $24. Marginal utility of X and Y are given in the
table below.

In order to maximize his satisfaction the consumer will not equate marginal utility of “X” with
the marginal utility of y because prices of these two goods are different. He will equate (per $
MuX) with (per $ MuY). So, reconstructing the above table by dividing marginal utilities
(MuX) of X by $2 and marginal utilities (MuY) of Y by $3, we get the table below.

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

In order to have maximum utility consumer will purchase 6 units of x any 4 units of y because
it satisfies the following two conditions required for consumers equilibrium. 𝐴𝑡 6 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑋=
𝑀𝑈𝑥/𝑃𝑥= 10/2=5 𝐴𝑡 4 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑌= 𝑀𝑈𝑌/𝑃𝑌= 15/3=5
𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑋 𝑎𝑛𝑑 𝑌=𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒= (𝑄𝑋× 𝑃𝑋)+(𝑄𝑌× 𝑃𝑌)=(6×2)+(4×3)=$24
Therefore for the consumer to arrive at the equilibrium he should take 6 units of Good X and
4 units of Good Y. At this level of consumption the consumer enjoys maximum level of
satisfaction.
Criticisms of the Cardinalists Approach
Even though the multi-commodity version of marginal utility theory is useful in
helping/demonstrating the underlying logic of consumer choice, it still has major weaknesses:
1. Utility is Subjective:
Utility is a subjective concept. It relates to man's psychology. It is not possible to be objective
about it. But the analysis of consumer's demand is objective.
2. Marginal Utility cannot be estimated for all Commodities:
Utility analysis is based on the concept of marginal utility. Marginal utility of only those
commodities can be measured which are divisible But division of some commodities T.V set,
refrigerator, etc.is not possible.
3. Marginal utility of money does not remain constant:
The other assumption of utility analysis is that marginal utility of money remains constant.
This assumption is also not realistic. As the quantity of money with a person increases, its
marginal utility diminishes and as his quantity of money decreases, its marginal utility
increases.
4. Consumer is regarded as Computer:
It considers consumer as a computer. According to this analysis, while spending his money, a
consumer always compares the amount of gain he will have by way of utility of the commodity

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BRIAN ROPI CONSUMER BEHAVIOUR – MARGINAL UTILITY THEORY

purchased with the loss that he will have to suffer by way of sacrifice of the money spent. But
in real life none of consumer is so calculating.
5. Does not explain Giffen Paradox:
Cardinal utility analysis does not explain Giffen paradox. It has no answer to explain as to why
the demand curve of many inferior goods slopes upwards (positive slope) from left to right. In
other words, why does demand extend with rise in price and why does demand contract with
fall in price.
6. Cardinal Measurement of Utility is not possible:
Utility cannot be measured in cardinal numbers like 1,2,3,4, etc. As such, utility derived from
different quantities of the goods can neither be added nor subtracted Marshall sought to
measure marginal utility indirectly in terms of money. But According to Pigou, it is not possible
to measure marginal utility indirectly in terms of money, because money can, at the best,
measure the intensity of demand for a good. It cannot measure the actual satisfaction.
7. Every Commodity is not an independent commodity:
The analysis is based on the assumption that every commodity is an independent commodity.
In real life, utility of a commodity is very much dependent upon the utility of other
commodities. No commodity is an independent commodity. Consumer's behaviour cannot
therefore be precisely measured through utility analysis.

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