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Advantages and Disadvantages of Cardinal Approach

This approach attempts to quantify the utility consumers receive from different products using cardinal numbers to understand consumption patterns over time and help economists predict future consumer behavior. It studies how consumers allocate limited incomes between different combinations of goods and how the time it takes to analyze consumer behavior can help both producers and consumers. However, critics argue that utility is subjective and cannot actually be quantified with cardinal numbers, and assumptions about constant marginal utility of money are unrealistic.

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418 views2 pages

Advantages and Disadvantages of Cardinal Approach

This approach attempts to quantify the utility consumers receive from different products using cardinal numbers to understand consumption patterns over time and help economists predict future consumer behavior. It studies how consumers allocate limited incomes between different combinations of goods and how the time it takes to analyze consumer behavior can help both producers and consumers. However, critics argue that utility is subjective and cannot actually be quantified with cardinal numbers, and assumptions about constant marginal utility of money are unrealistic.

Uploaded by

Gift Moyo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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This approach attempts to quantify utility using cardinal numbers or weights.

It takes a certain
period of time, to analyse and record the utility derived by a consumer utilizing two certain products
given the limited income which helps in understanding the consumer pattern of consumption.
Thereby it will be easy to make a judgment as to which products and how the consumer will spend
on them. Also, this will enable economists to predict consumer behaviour for the future, hence
decision-making when it comes to production will also improve as they will be producing based on
analysed data collected over a period of time.

It studies two combinations of goods. The time taken to record the behaviour of consumers will help
producers and also consumers understand the types of goods they consume and their complements
and available substitutes. By doing so this will be an advantage to consumers because satisfaction
will be derived from the product they prefer and have full knowledge of the cost of its production,
and avoid speculation and this will in turn help them in monitoring the price changes. Substitutes are
products that can be used in place of another while compliments goods are products that go hand in
hand with each other hence it’s vital for consumers to understand the role played by the cardinal
approach.

This approach explains the law of demand for goods or services to satisfy the needs and wants of a
consumer. The law of demand states that an increase in the price of a product is accompanied by a
decrease in the quantity demanded of the same product. It clearly shows that the quantity
demanded is mainly determined by the price of a product, hence showing that there is an inverse
relationship between the price and the quantity of a commodity. This will help the consumers as
they will demand products that they can afford and the same products will be supplied given that
producers are profit-oriented in such that they will produce those products that have high demand
and less for those that have low demand.

However, to a less extent, there are disadvantages of this approach as more products are
scrutinized it becomes more unrealistic in the world. In other words, it is assumed in this analysis
that utility is cardinally measurable. According to this, how much utility a consumer obtains from
goods can be expressed or stated in cardinal numbers such as 1, 2, 3, 4, and so forth. But in actual
practice utility cannot be measured in such quantitative or cardinal terms.

Since utility is a psychic feeling and a subjective thing, it cannot be measured in quantitative terms.
In real life, consumers are only able to compare the satisfactions derived from various goods or
various combinations of the goods. In other words, in the real-life consumer can state only whether
a good or a combination of goods gives him more or less, or equal satisfaction as compared to
another.’ Thus, economists like J.R. Hicks are of the opinion that the assumption of cardinal
measurability of utility is unrealistic and therefore it should be given up.”

Also, an important assumption of cardinal utility analysis is that when a consumer spends a varying
amount on a good or various goods or when the price of a good changes, the marginal utility of
money remains unchanged. But in actual practice, this is not correct. As a consumer spends his
money income on goods, money income left with him declines.
With the decline in the money income of the consumer as a result of an increase in his expenditure
on goods, the marginal utility of money to him rises. Further, when the price of commodity changes,
the real income of the consumer also changes. With this change in real income, the marginal utility
of money will change and this would have an effect on the demand for the good in question, even
though the total money income available to the consumer remains the same.

But utility analysis ignores all this and does not take cognizance of the changes in real income and its
effect on demand for goods following the change the in price of a good. As we shall see below, it is
because of the assumption of constant marginal utility of money that Marshall ignored the income
effect of the price change which prevented Marshall from understanding the composite character of
the price effect (that is, the price effect is the sum of substitution effect and income effect).

References

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