UNIT-2 ech.docx - UNIT-2 1.1CONSUM ER\u2019S BEHAVIOUR CARDINAL UTILITY ANALYSIS Cardinal utility analysis is the oldest theory of demand which provides an

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UNIT-2 1.1CONSUM ER’S BEHAVIOUR: CARDINAL UTILITY ANALYSIS Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumer’s demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded of a product. 1.1 INTRODUCTION The price of a product depends upon the demand for and the supply of it. In this part of the book we are concerned with the theory of consumer’s behaviour, which explains his demand for a good and the factors determining it. Individual’s demand for a product depends upon price of the product, income of the individual, and the prices of related goods. It can be put in the following functional form: D x= f (P x , I, P y , P 2 , T etc.) Where D x stands for the demand of good X, P x for price of good X, I for individual’s income, P y P z for the prices of related goods and T for tastes and preferences of the individual. But among these determinants of demand, economists single out price of the good in question as the most important factor governing the demand for it. Indeed, the function of a theory of consumer’s behaviour is to establish a relationship between quantity demanded of a good and its own price and to provide an explanation for it. Recently, cardinal utility approach to the theory of demand has been subjected to severe criticisms and as a result some alternative theories, namely, Indifference Curve Analysis, Samuelson’s Revealed Preference Theory, and Hicks’ Logical Weak Ordering Theory have been propounded. 1.2 ASSUMPTIONS OF CARDINAL UTILITY ANALYSIS Cardinal utility analysis of demand is based upon certain important assumptions. Before explaining how cardinal utility analysis explains consumer’s equilibrium in regard to the demand for a good, it is essential to describe the basic assumptions on which the whole utility analysis rests. As we shall see later, cardinal utility analysis has been criticized because of its unrealistic assumptions.
The basic assumptions or premises of cardinal utility analysis are as follows: 1.2.1 The Cardinal Measurability of Utility The exponents of cardinal utility analysis regard utility to be a cardinal concept. In other words, they hold that utility is a measurable and quantifiable entity. According to them, a person can express utility or satisfaction he derives from the goods in the quantitative cardinal terms. Thus, a person can say that he derives utility equal to 10 units from the consumption of a unit of good A, and 20 units from the consumption of a unit of good B. Moreover, the cardinal measurement of utility implies that a person can compare utilities derived from goods in respect of size, that is, how much one level of utility is greater than another. A person can say that the utility he gets from the consumption of one unit of good B is double the utility he obtains from the consumption of one unit of good A.

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