Marshallian Utility Analysis
Total Utility: Total utility of a commodity is the sum utilities, which a consumer attains from the consumption of that commodity at a given period of time.
Marginal Utility: Utility: Marginal utility can be defined as the change in the total utility resulting from a one-unit change in the consumption of a commodity per unit of time.
Marginal utility is the additional or extra satisfaction, which is yielded from consuming one additional unit of a commodity.
Marginal Utility = Change in total utility/Change in quantity consumed
Utility is measured in two ways:
1. Cardinal Utility: Neoclassical economists used the cardinal concept to measure utility. They think that utility is cardinally measurable that means numerically measurable. Suppose: 10 util. 8 util etc.
2. Ordinal Utility: Modern economists think that utility is not cardinally measurable. It can be compared with the satisfaction of one unit to another. It is completely a psychological matter. This concept is used in case of indifference curve analysis.
Basic Assumptions of Marginal Utility Analysis
We will see a few basic assumptions on which the marginal utility analysis is based. The following are the main basic assumptions:
1. Cardinal Measurement of Utility
It is assumed that utility can be measured by assigning definite numbers. Such as, 1, 2,3 etc. that means utility is quantifiable entity. According to this concept, a person can express the satisfaction, which is derived from the consumption of a commodity in quantitative terms.
Example. From the 1st unit 10 util,
From the 2nd unit 8 util
In this way, it is possible for a consumer to compare the utilities of different
Commodities. Example: for him fruit has utility 20 util, and sweet has utility 10 util, etc. utility usually measured-in imaginary units.
2. Utilities are Independent
Marginal utility analysis assumes that the utilities of different commodities are independent of one another. That is the utility of one commodity does not affect that of another. According, to this assumption, the utilities of various goods are additive, i.e. the separate utilities of the various goods can be added to obtain the total sum of the utilities of all goods consumed.
Fruits gives = 10 util
Sweet = 8 util
Total utilities = 18 util
3. Constant Marginal Utility of Money
The marginal utility of money remains constant even though the quantity of money with the consumer is diminished by the successive purchases. It is assumed that while marginal utility of a commodity varies with the quantity of the commodity purchased, the marginal utility of money remains throughout the same as the quantity of the goods purchased varies.
This assumption becomes necessary because the marginal utility of a commodity is measured in terms of money.
When a person purchases more of a goods, the amount of money must diminish and the marginal utility of money must increase. But, this variation in the marginal utility o: money is ignored and it is assumed to remain constant throughout.
The marginal utility analysis also assumes that from one’s experience (judging what happens in one’s own mind), it is possible to draw inference about another person. This is self-observation applied to another person. It is assumed that the mind of men works identically in similar situation.