Cardinal utility theory, in microeconomics, is an effort to quantify the happiness or satisfaction economic consumption choices provide to consumers. This consumers' happiness or satisfaction is identified by the objectified economic term "utility": something has utility for the consumer to the degree or at the rate by which it provides...
Cardinal utility theory, in microeconomics, is an effort to quantify the happiness or satisfaction economic consumption choices provide to consumers. This consumers' happiness or satisfaction is identified by the objectified economic term "utility": something has utility for the consumer to the degree or at the rate by which it provides (the utility of) happiness or satisfaction to the consumer. The idea of cardinal is opposite to that of ordinal: cardinalists believe in the quantifiability and measurability of consumers' economic experience of utility; ordinalists believe utility cannot be measured, cannot be quantified, because utility exists in "ordinal magnitudes" in which "bundles" of "baskets of goods" give comparative utility and because the consumer chooses between the magnitudes of comparative utility provided by various bundles of baskets of goods (Karnatak University, India). For some cardinalists, utility is measured in units of money because of the law of the constancy of the marginal utility of money (the utility of money is fixed and unchanging), whereas other cardinalists (the dominant school of cardinalists) measure utility in the imaginary unit of "utils."
Some assumptions are made in utility theory, one of which being that the consumer is rational and behaves in the marketplace in a rational manner. Consequently, the actions of a rational consumer in a marketplace are said to reflect the law of demand, which states that, when all other economic factors are held constant, there is an inverse relationship between price and demand wherein as price increases, demand decreases: demand for a good or service (when other factors are constant) is inversely dependent upon price. Cardinal utility theory approaches consumer demand from the standpoint of consumer utility, wherein demand is dependent upon factors of utility, price, income, substitutes and complementary goods.
Cardinalists derive the demand curve by assessing utility (U), total utility (TU), marginal utility (MU; marginal utility is the utility gained from one additional unit of a good), quantity demanded (Q/O), and price (P). Utility derived from a good increases as long as marginal utility (MU) is greater than price paid (MU > P). Utility reaches its apex, its equilibrium, where marginal utility equals price (MU = P). Utility diminishes when marginal utility is less than price paid (MU < P). The graphical representation of the increase, apex and diminishment of utility shows a parabola with the equilibrium quantity corresponding to the apex, which is reached before total utility (TU) begins diminishment with each added marginal unit of a good.
On a demand curve--for which each increment of marginal utility (MU) relates to an increment in price (P) and in which price inversely correlates to quantity demanded--the curve will be downward sloping because increases in quantity demanded correlate inversely to declining prices: as prices go downward, demand for the good goes upward (rightward).
The drawbacks (Karnatak University, India) of using cardinal utility theory to determine demand for a good, or for one bundle or another of baskets of goods, arise from the idea that the assumptions made by cardinal utility theory may or may not be sound. (1) The assumption that satisfaction can be objectively quantified with consistency in one individual or across a population of individuals is based on psychological and economic concepts that, when utility theory was founded, were then immature and that now inadequately reflect contemporary complexities. (2) Similarly, the concept of quantifying a subjective, seemingly impulse-based tendency toward liking or wanting seems poorly founded in scientific understanding (perhaps science and technology have now advance enough to overcome the problem of quantification of subjective impulses, but, if so, it seems it will still be a long while before such advances make an inroad into everyday economic analysis). (3) In our contemporary economy, the constant marginal utility of money is a concept that defies current reality since utility of money changes as the value of money changes (and that rather rapidly sometimes). (4) Marginal utility and diminishing utility are founded upon psychological principles that don't hold up as continuingly valid; new fields of psychology, such as the psychology of happiness, or positive psychology, shed new light upon the assumptions of marginal and diminishing utility underlying cardinal utility theory, which call the assumption into question ... although, with advances in scientific technology, the verdict may still be out on the true nature of these drawbacks.