UTILITY: "Utility" is an economic term referring to the total satisfaction received

from consuming a good or service.

Total utility (TU) is defined as the total amount of satisfaction that a person can
receive from the consumption of all units of a specific product or service.
Marginal utility (MU) is defined as the additional utility gained from the
consumption of one additional unit of a good or service.
There are two approaches to utility analysis. Ordinal approach and Cardinal
approach.
CARDINAL UTILITY THEORY: Cardinal utility analysis is based on the cardinal
measurement of utility which assumes that utility is measurable in terms of
money.
Assumptions of cardinal utility theory:
1. Rationality
The consumer is assumed to the rational. He tries to maximize his total utility under the income
constraint.
2. Cardinal Utility
The utility of each commodity is measurable. Utility is cardinal concept. The most convenient
measure is money. Thus utility can be measured quantitatively in monetary units or cardinal
units.
3. Constant Marginal Utility of Money
The utility derived from commodities are measured in terms of money. So, money is a unit of
measurement in cardinal approach. Hence, marginal utility of money should be constant.
4. Diminishing Marginal Utility
If the stock of commodities increases with the consumer, each additional stock or unit of the
commodity gives him less and less satisfaction. It means utility increases at a decreasing rate.
5. Independent Utilities
It means utility obtained from commodity X is not dependent on utility obtained from commodity
Y. It is not affected by the consumption of other commodities.

ORDINAL UTILITY THEORY: The Ordinal Utility approach is based on the fact
that the utility of a commodity cannot be measured in absolute quantity, but
however, it will be possible for a consumer to tell subjectively whether the
commodity derives more or less or equal satisfaction when compared to another.

Assumptions for ordinal approach to utility analysis:

1. Ordinal utility: Utility cannot be measured in terms of money
2. Diminishing Marginal rate of substitution: Marginal rate of substitution is
defined as the number of units of commodity y that must be given up in exchange for an
extra unit of commodity x so that consumer maintains the same level of satisfaction

3. Transitivity: The way in which preferences are transferred logically. if product

x is preferred to product y and product y is preferred to product z, then it follows
that product x is preferred to product z.
4. Convexity: Indifference curve is convex to the origin. This means that
the slope of indifference curve decreases as we move the curve from
left to right

Cardinal
utility

Ordinal utility

Satisfaction derived
can be measured in
terms of money

Satisfaction derived
cannot be measured in
terms of money

Follows the law of

diminishing marginal
utility

Follows the
indifference curve

Emphasizes on units

Emphasizes on levels
or ranks

Unit of measurement
is Utils

Can be ordered , not

measured