Concept of Utility and Approaches of Utility Analysis

Definition of utility:

Utility of a commodity is its want-satisfying capacity. The more the need of a commodity or the stronger the desire to have it, the greater is the utility derived from the commodity. Hence, utility means the power of a commodity to satisfy a human wants. The consumers consume different goods according to the utility available in them. When a consumer consumes goods, he/she derives satisfaction, which is called utility.  Utility is subjective. Different individuals can get different levels of utility from the same commodity. For example, some one who likes chocolates will get much higher utility from a chocolate than some one who is not so fond of chocolates, Also, utility that one individual gets from the commodity can change with change in place and time.

Cardinal Utility Approach:
This approach was developed by Alfred Marshall. Cardinal utility analysis assumes that level of utility can be expressed in numbers. This approach states that utility obtained from the consumption of goods/services can be measured in definite numbers such as 1, 2, 3, 4, and so on. It focuses on the numerical or quantitative measure of utility and it is used to determine a consumer's equilibrium.

Ordinal Utility Approach:
The approach was developed by J. R. Hicks and G. D. Allen. It is based on the ordinal measurement of utility or satisfaction. This approach states that utility cannot be measured in definite numbers. It states that satisfaction or utility obtained from the consumption of goods can be put into rank or order, like, 1st, 2nd, 3rd, and so on.

Assumptions of Cardinal Utility Analysis:

1. Rational Consumer:
The consumer is rational. He seeks to maximize satisfaction from the limited income which is at his disposal.

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 does not affected by the consumption of other commodities.