Assumptions of Cardinal Approach

Assumptions of Cardinal Approach:
i. Rationality:
Assumes that a consumer is rational and satisfies his/her wants in order of his/her preferences.
Therefore, he/she firstly prefers to purchase those goods which yield highest utility and lastly
those that provide lowest utility.
ii. Limited Money Income:
Refers to one of the important assumptions of the cardinal utility approach. According to this
approach, a consumer has a limited amount of income to be expended on goods selected by
him/her for consumption. Therefore, in such a case when there is an objective of utility
maximization along with limited income, he/she selects those goods whose consumption is
unavoidable.
iii. Maximization of Satisfaction:
Implies that every rational consumer strives to maximize his/her satisfaction from the limited
income.
iv. Utility is Measurable:
Assumes that utility is cardinally measureable. Therefore, utility of one unit of good equals to
the units of money that a consumer is willing to pay, which means that 1 util = 1 unit of money.
v. Diminishing Marginal Utility:
Constitutes the basis for consumer behavior analysis. The utility gained falls as more and more
units of a good are consumed.
vi. Constant Marginal Utility of Money:
Implies that whatever the level of income, the MU of money remains the same. According to
this assumption, money is used as a measure of utility.
vii. Utility is Additive:
Implies that utility is not only cardinally measurable, but can be added together to obtain the
total utility. For instance, a consumer consumes X1, X2, and X3 units of good X and derives U1,
U2 and U3 utils, respectively
Limitations of Cardinal Approach:
Marshall’s Utility Analysis: Criticism # 1.
Unrealistic Assumptions:
Marshall’s utility analysis is based on some unrealistic assumptions. For instance, Marshall
assumed that utility derived from a commodity can be measured in cardinal numbers. But,
modern economists like J. R. Hicks and R. G. D. Allen had suggested that utility, being a
psychological concept, can never be measured in cardinal numbers. Actually, there is no
measuring rod to measure utility derived from the consumption of a commodity. According to
them, utility can be measured in ordinal numbers. This means that the consumer is capable of
comparing different levels of utility. A consumer can say that a particular commodity gives him
a higher or lower level of satisfaction than another commodity. Of course, he cannot quantify
the level of satisfaction. As the law of demand is based on Marshall’s utility analysis, the
explanation of the law of demand seems to be inaccurate.

MU of Money Can Never be Constant:
Marshall’s assumption of constant marginal utility of money is another unrealistic assumption.
And this is the most crucial assumption of the utility theory. According to Marshall, utility
from a good can be measured in terms of money. To measure utility (in cardinal numbers) in
terms of money, marginal utility of money must remain invariant. But, like commodities,
marginal utility of money also diminishes when stock of money rises. If it is so, measurement
of utility in terms of money seems to be irrational.
No Formal Distinction between Income and Substitution Effect:
Because of the constancy in the marginal utility of money, Marshall could not distinguish
between income effect and substitution effect of a price change. We know that a change in the
price of a commodity results in two types of changes—one is the income effect and another is
the substitution effect. Marshall considered only the substitution effect and ignored the income
effect. Because of constancy in the marginal utility of money, Marshall ignored the income
effect. As Marshall considered only substitution effect, his demand curve is always negative
sloping. In other words, Marshall could not explain Giffen Paradox for which the law of
demand does not hold. Because of these criticisms, Marshallian utility analysis failed into
disrepute. In the 1930s Hicks and Allen introduced an alternative theory known as ordinal
utility theory or indifference theory which is an improvement over Marshall’s cardinal utility
theory.

Assumptions of Cardinal Approach

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Assumptions of Cardinal Approach:

Marshall’s Utility Analysis: Criticism # 2.

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