The Cardinal Utility Approach: Assumptions and Limitations

Both laws covered in this chapter — Diminishing Marginal Utility and Equi-Marginal Utility — rest on one foundational assumption: that utility can be measured cardinally, i.e., in exact numerical units (utils), the way weight is measured in kilograms or temperature in degrees. This is called the Cardinal Utility Approach, associated chiefly with Alfred Marshall, and the Maharashtra HSC Std XII syllabus expects a student to know both its core assumptions and the standard criticisms levelled against it.

Core assumptions of the Cardinal Utility Approach.

1. Utility is measurable in objective, numerical units called utils (e.g., "this apple gives 10 utils of satisfaction").
2. Utility is additive — the utilities of different goods consumed by a person can be summed to get a combined measure of total satisfaction.
3. The marginal utility of money remains constant even as a person spends it — a simplifying assumption needed so that money can serve as a stable measuring rod for the utility of other goods.
4. Rationality — the consumer is assumed to act rationally, always aiming to maximise total utility.
5. Independence of utilities — the utility a consumer gets from one good is assumed to be independent of the quantity of other goods consumed (no interaction effects between goods).

Criticisms / limitations of the Cardinal Utility Approach. Later economists (notably J.R. Hicks and R.G.D. Allen, who developed the alternative Indifference Curve/ordinal approach) raised several objections:

1. Utility cannot really be measured in exact numbers. Satisfaction is a subjective, psychological experience; there is no physical instrument analogous to a thermometer or a weighing scale for utility, so the "util" is at best a convenient fiction, not a real measuring unit.
2. The assumption of a constant marginal utility of money is unrealistic — as a person's income or spending changes, the utility of an additional rupee to them logically ought to change too, undermining the use of money as a stable yardstick.
3. Utility from different goods is rarely fully independent — the satisfaction from tea, for instance, can depend on whether sugar or milk is also available, contradicting the assumption of independence.
4. The approach ignores the effect of a price change on real income (what the later Hicksian approach separates into the income effect and the substitution effect) — cardinal utility theory studies each good's utility in isolation and does not cleanly separate these two effects of a price change. …