The concept of ‘utility' was introduced to social thoughts by Bentham in 1789 and to economic thoughts by Jevons in 1871. The neo-classical economists devised the following system to measure the utility of a commodity. A neo-classical economist, Walras, coined a term ‘util', meaning ‘units of utility' and used money as the measure of utility.
The law of diminishing marginal utility is central to the Cardinal utility analysis of the consumer behavior. This law states that as the quantity consumed of a commodity increases per unit of time, the utility derived by the consumer from the successive units goes on decreasing, provided the consumption of all other goods remain constant. A consumer reaches equilibrium position when he maximizes his total utility given his income and prices of commodities he consumes. Analyzing consumer's equilibrium requires answering the question “how does a consumer allocate his money income among the various goods and services he consumes to arrive at his equilibrium?”
[...] CONSUMER'S EQUILIBRIUM: THE ORDINAL UTILITY APPROACH A consumer attains his equilibrium when he maximizes his total utility, given his income and prices of goods and services he consumes. According to ordinal utility approach, two conditions must be satisfied for the consumer to be in equilibrium, these are: 1. Necessary or first order conditions 2. Supplementary or second order condition Necessary or first order conditions: The necessary conditions for utility to be maximum requires that MRSx,y must be equal to the price ratio. [...]
[...] ‘utility', the utility of a commodity for a consumer equals the money which he or she is willing to pay for the commodity. For example, if a thirsty is willing to pay $ 0.97 for one can of Pepsi, his/her utility of one can of Pepsi is ‘50utils'. LIMITATIONS OF THIS METHOD: 1. This method of measuring utility has been rejected by the modern economists as it was realized over time that absolute or cardinal measurement of utility is not possible The difficulties in measuring ‘utility' proved insurmountable Money was not found to be a reliable measure of utility because the utility of money changes with its stock Neither economists nor psychologists nor other scientists could devise a reliable technique or instrument for measuring the feeling of satisfaction or ‘utility' The modern economists have, therefore, discarded the concept of ‘cardinal utility'. [...]
[...] For e.g.: Let us suppose that a consumer makes five combinations d and e of two commodities X and All these combinations yield him the same satisfaction The consumer is therefore indifferent between them. The five combinations commodities X and Y may be called an indifference schedule. INDIFFERENCE SCHEDULE OF COMMODITIES X AND Y COMBINATION COMMODITY X + COMMODITY Y UTILITY Above table shows 5 combinations of two goods, X and Y which gives the same utility. The last column of the table shows an undefined utility Derived from each combination of X and Y. [...]
[...] The unit of the consumer goods must be standard Consumer's taste & preferences remain unchanged during the period of consumption There must be continuity in consumption and where break in continuity is necessary, it must be appropriately short The mental condition of the consumer remains normal during the period of consumption. Given these conditions the law of diminishing marginal utility holds universally. CONSUMER'S EQUILIBRIUM: CARDINAL UTILITY APPROACH A consumer reaches equilibrium position when he maximizes his total utility given his income and prices of commodities he consumes. [...]
[...] Transitivity of choice means that if a consumer prefers A to B and B to he must prefer A to C. Transitivity: If A > B and B > then A > C Consistency of choice means that if a consumer prefers A to B in 1 period, he must not prefer B to A in another period or treat them as equal, everything remaining the same. Consistency: If A > B in 1 period, then B is not greater than A or B is not equal to A in another Non-satiety: It means that the consumer has not reached the point of saturation in case of any commodity and he is not over supplied with goods in question. [...]
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