Definition: The Cardinal Utility approach is propounded by neo-classical economists, who believe that utility is measurable, and the customer can express his satisfaction in cardinal or quantitative numbers, such as 1,2,3, and so on.
The neo-classical economist developed the theory of consumption based on the assumption that utility is measurable and can be expressed cardinally. And to do so, they have introduced a hypothetical unit called as “Utils” meaning the units of utility. Here, one Util is equivalent to one rupee and the utility of money remains constant.
Over the passage of time, it was realized that the absolute measure of utility is not possible, i.e. it was difficult to measure the feeling of satisfaction cardinally (in numbers). Also, it was difficult to quantify the factors that cause a change in the moods of the consumer, their tastes and preferences and their likes and dislikes. Therefore, the utility is not measurable in quantitative terms. But however, it is being used as the starting point in the consumer behavior analysis.
The consumption theory is based on the notion that consumer aims at maximizing his utility, and thus, all his actions and doings are directed towards the utility maximization. The consumption theory seeks to find out the answers to the following questions:
- How does a consumer decide on the optimum quantity of a commodity that he/she wishes to consume?
- How consumers allocate their disposable incomes between several commodities of consumption, such that utility is maximized?
The cardinal utility approach used in analyzing the consumer behavior depends on the following assumptions to find answers to the above-stated questions:
- Rationality: It is assumed that the consumers are rational, and they satisfy their wants in the order of their preference. This means they will purchase those commodities first which yields the highest utility and then the second highest and so on.
- Limited Resources (Money): The consumer has limited money to spend on the purchase of goods and services and thus this makes the consumer buy those commodities first which is a necessity.
- Maximize Satisfaction: Every consumer aims at maximizing his/her satisfaction for the amount of money he/she spends on the goods and services.
- Utility is cardinally Measurable: It is assumed that the utility is measurable, and the utility derived from one unit of the commodity is equal to the amount of money, which a consumer is ready to pay for it, i.e. 1 Util = 1 unit of money.
- Diminishing Marginal Utility: This means, with the increased consumption of a commodity, the utility derived from each successive unit goes on diminishing. This law holds true for the theory of consumer behavior.
- Marginal Utility of Money is Constant: It is assumed that the marginal utility of money remains constant irrespective of the level of a consumer’s income.
- Utility is Additive: The cardinalists believe that not only the utility is measurable but also the utility derived from the consumption of different commodities are added up to realize the total utility.
Thus, the cardinal utility approach is used as a basis for explaining the consumer behavior where every individual aims at maximizing his/her utility or satisfaction for the amount of money he spends on the consumption of goods and services.