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LOAN LOSS RESERVES: A special account set aside by banks acting as a buffer between deposits and net worth that's used in case a loan is not repaid. Without this reserve, an unpaid loan on the asset side of a bank's balance sheet would require an adjustment of deposits or net worth on the liability side. The loan loss reserve is used for this adjustment.
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                           CARDINAL UTILITY: The notion that utility--the satisfaction of wants and needs achieved through the consumption of goods and services--can be measured with numerical values (1, 2, 3, etc.) that are based on a benchmark scale. Cardinal utility presumes that satisfaction is a measurable characteristic of a person, like height or weight. The contrasting notion is ordinal utility, which is based on a ranking of preferences. Cardinal utility is a view of utility measurement based on the presumption that the satisfaction of wants and needs is a quantifiable characteristic of human activity. In other words, utility can be measured with numerical values (1, 2, 3, etc.) along a scale. If so, then the utility generated from consumption can be evaluated against an objective standard, which then makes it possible to compare utility among different goods and among different people.Unfortunately, the cardinal measurement of utility has never been achieved, is probably impossible, and currently resides in the hypothetical realm of economic analysis. In the modern study of economics, cardinal utility is used exclusively as an instructional technique in consumer demand theory and utility analysis. However, even though cardinal utility is hypothetical, it does provide insight into consumer behavior, especially market demand and the law of demand. Measuring UpEarly economists, led by Jeremy Bentham, developed the notion of utility based on the presumption that it was a measurable dimension of a person, much like height or weight.To illustrate how cardinal utility would be measured, in principle, consider the cardinal measurement of another human trait--foot size. Pollyanna Pumpernickel, a petite female, has a dainty foot that measures a scant 8 inches long. Winston Smythe Kennsington III, an average-sized male, offers an average-sized foot that measures 11 inches. Barton Broadway, a rather large human being, sports an enormous foot that measures 14 inches. These three differentially sized feet can be easily compared. - First, based on the standard unit used for measuring length, the inch, it is readily obvious that Barton has the largest of the three feet, Paula the smallest, and Winston is in the middle.
- Second, Barton's foot is 3 inches longer than Winston's foot. And Winston's foot is 3 inches longer than Paula's foot. The difference in length between Barton's foot and Winston's foot is exactly the same as the difference in length between Winston's foot and Paula's foot.
- Third, anyone with a ruler and shoeless foot can compare the size of their foot with that of Barton, Winston, and Paula. How does Duncan Thurly, with an 12 inch foot compare? Bigger than Winston by an inch. Smaller than Barton by 2 inches. And surpassing Paula by 4 inches.
A Benchmark?The ability to measure and compare the length of each person's foot is based on a standard measurement unit that provides a benchmark. In this case the standard unit is the inch. This unit is objective, quantifiable, and applies to everyone regardless of political affiliation, religious belief, cultural background, and personal preferences. An inch is an inch is an inch.The cardinal measurement of utility requires a similar standard, a comparable objective measurement unit. The hypothetical unit commonly used for instructional purposes is the "util." That is, an economics instructor might state that Duncan Thurly receives 10 utils from the consumption of a hot fudge sundae. Or Pollyanna Pumpernickel receives 5000 utils from listening to a song. For the "util" measure to have meaning, to make it possible to compare the utility of one consumer with another, or to compare the consumption of one good with another, a "util" standard is needed, one that is objective, quantifiable, and applies to everyone regardless of political affiliation, religious belief, cultural background, and personal preferences. Substantially SubjectiveSuch a "util" measurement standard does not exist. And such a standard is unlikely to be developed. The reason is that satisfaction and utility are subjective. In the same way that "beauty is in the eye of the beholder" satisfaction is in the eye of the consumer. The satisfaction that Pollyanna Pumpernickel receives from listening to a song depends on her "political affiliation, religious belief, cultural background, and personal preferences."Such subjectivity is likely to differ from person to person and for the same person from time to time. Does Paula receive more or less satisfaction than Barton Broadway from listening to the same song? Does Paula receive more or less satisfaction today than yesterday from listening to the same song? Does Paula receive more or less satisfaction from listening to one song than another? Yes or no or maybe. No one knows. A Measure of the Future?While the current, state-of-the-art understanding is that utility is not measurable, some have speculated that future measurement might be possible. Psychologists, neurologists, and others who study human behavior and the brain have made great strides in quantifying mental activity. Perhaps in the future, a util measure might be constructed based on the activity of brain neurons, the pattern of brain waves, or the composition of brain chemicals. It might happen. Who knows what the future will bring?However, in the present day world of economic analysis cardinal utility remains purely hypothetical residing in the world of economic instruction.
Recommended Citation:CARDINAL UTILITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: October 30, 2024].
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Today, you are likely to spend a great deal of time at a going out of business sale trying to buy either a coffee cup commemorating the first day of winter or a video game player. Be on the lookout for florescent light bulbs that hum folk songs from the sixties.
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The penny is the only coin minted by the U.S. government in which the "face" on the head looks to the right. All others face left.
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