The Cardinal utility approach provides a sound basis for analyzing consumer behavior based on the arithmetic measurement and expression of utility. However, economists have pointed out some criticisms or drawbacks of cardinal utility analysis. The following are the basic drawbacks or limitations of cardinal utility analysis.
An incorrect assumption of cardinal measurement of utility
According to critics, the very first assumption of the cardinal utility approach that utility is cardinally measurable is unsound. In reality, utility is a subjective concept that cannot be measured objectively or quantitatively. In this regard, J.R. Hicks and R.G.D. Allen assumed that utility as ordinal.
The Marginal Utility of Money is not constant
Cardinal utility analysis assumes that MU of money remains constant and serves as a measure of utility. But in reality, the marginal utility of money does not remain constant. There is a decrease in the marginal utility of money with an increase in income and vice versa. Therefore, it cannot dole out as an account of utility derived from goods and services.
Cardinal Utility Analysis does not Split-up Price Effect into Income Effect and Substitution Effect
The cardinal utility analysis is not able to split the price effect into income effect and substitution effect. When there is a decrease in the price of any product then there is an increase in the purchasing power of the consumer or real income of the consumer. Therefore, it is necessary to decompose the price effect into income and substitution effect. This concept is included in ordinal utility analysis.
Limitation relating to Introspection Axiom
Under the cardinal utility analysis, the psychological law of diminishing marginal utility has been established from introspection. This law has been acknowledged as an axiom exclusive of empirical confirmation.
Derivation of Demand Curve
The cardinal utility approach derives the demand curve based on the ceteris paribus assumption. This is also unrealistic. The theory has ignored the substitution and income effect and their effect on the derivation of the demand curve.
Ignorance of Indivisible Goods
Cardinal utility analysis doesn’t explain anything about the demand for indivisible goods such as TV, computer, etc. In general, only one unit of such a good is purchased by consumers at a time. So, it is difficult to apply the law of diminishing marginal utility for indivisible goods.
Unrealistic Account of Independent Utility
Cardinal utility analysis, utilities are assumed, independent. It means utility obtained from one good is not affected by the utility obtained from another good. But, the ordinal utility helps to prove that utilities are dependent. So the goods can be divided into substitutes and complement under ordinal utility analysis.
Cardinal Utility Analysis Ignores Inferior Goods
The cardinal utility analysis has ignored the phenomenon related to inferior goods. The goods having negative income effects are known as inferior goods and such fact is not considered by the cardinal approach. Ordinal utility analysis can describe Giffen or inferior goods.
Cardinal utility analysis believes that the satisfaction derived from the consumption of the commodity can be expressed in mathematical numbers. It analyzes the behavior of the consumers with a cardinal account of their satisfaction, constant marginal utility, diminishing marginal utility, independent utility, and so on. The Cardinal utility approach provides a sound basis for analyzing consumer behavior with such assumptions applied in its methodology. However, economists have pointed out these criticisms or drawbacks of cardinal utility analysis and in response, they have developed the ordinal utility analysis approach.