Examples of Cardinal and Ordinal Utility with Table and MCQs
In economics, the concept of utility helps us understand how consumers make choices among various goods and services. Utility is the satisfaction or pleasure that a person receives when consuming a product or service. This satisfaction can differ from individual to individual as it depends on personal preferences, desires, and needs. Two major approaches are used to analyze utility: the Cardinal Utility approach and the Ordinal Utility approach. Understanding the difference between them is essential for accurately interpreting consumer behavior and decision-making in microeconomics.
Meaning and Definition of Utility
Utility refers to the ability of a good or service to satisfy the wants or desires of a consumer. Economists use the concept of utility to explain how and why individuals make certain purchasing decisions. Because utility is a psychological feeling, it is subjective and can change with factors such as consumer mood, taste, or circumstance.
Cardinal Utility
Cardinal Utility theory states that the satisfaction derived from consuming goods and services can be measured in specific numerical units, known as "utils." For example, if a person assigns 30 utils to pizza and 20 utils to chow mein, it means pizza gives more satisfaction than chow mein, and the degree of that difference can be quantified. This approach was suggested by classical economists, including Alfred Marshall, who even proposed using monetary value as a proxy for measuring utility (one rupee could equal one util).
The central idea of Cardinal Utility is that we can assign numbers to utility to compare and analyze consumer choices using mathematical formulas. Measuring utility in numbers enables the analysis of concepts like total utility and marginal utility.
- Total Utility (TU): The sum of satisfaction received from consuming all units of a good.
Formula: TU = MU1 + MU2 + ... + MUn - Marginal Utility (MU): The additional satisfaction from consuming one more unit.
Formula: MU = TUn - TUn-1
Ordinal Utility
Ordinal Utility theory suggests that while utility cannot be measured numerically, consumers can rank their preferences in order. That means a consumer can say they prefer tea over coffee but cannot quantify by how much. This approach, developed by economists like John Hicks and R.J. Allen, focuses on the order or ranking of goods based on satisfaction, using concepts like indifference curves to represent different combinations of goods providing equal satisfaction.
Ordinal utility is more common in modern economics as it acknowledges the subjective and relative nature of satisfaction. It assumes that while we cannot assign exact values to satisfaction, we can identify which goods are preferred over others.
- Consumer preferences are represented by rankings rather than numbers.
- Indifference curves illustrate combinations of goods that yield the same satisfaction.
- Ordinal approach accounts for psychological aspects of decision-making.
Comparison Table: Cardinal vs Ordinal Utility
| Basis of Difference | Cardinal Utility | Ordinal Utility |
|---|---|---|
| Meaning | Satisfaction measured numerically in 'utils' | Satisfaction ranked in order of preference |
| Approach | Quantitative | Qualitative |
| Evaluation method | Utils (numerical units) | Ranks (first, second, third, etc.) |
| Analysis Tool | Marginal Utility Analysis | Indifference Curve Analysis |
| Realism | Less realistic; assumes exact measurement | More realistic; acknowledges subjectivity |
| Promoted By | Traditional and Neo-Classical Economists | Modern Economists |
| Example | Pizza: 30 utils, Chow mein: 20 utils | Tea preferred over coffee, coffee over juice |
Key Principles and Practical Examples
Suppose a student assigns 20 utils to an apple and 10 utils to a banana. In this case, the student is using the Cardinal Utility approach because satisfaction is measured in numbers.
If another student says they prefer pizza over burgers and burgers over sandwiches, but does not assign any numbers, the Ordinal Utility approach is used because the focus is on ranking, not measuring.
Cardinal Utility helps calculate total and marginal utility and is often used where clear numbers are necessary, though it's considered less realistic. Ordinal Utility, on the other hand, is preferred for most modern economic analysis due to its practical reflection of consumer behavior.
Step-by-Step Approach: Applying Utility Frameworks
| Step | Description |
|---|---|
| 1 | Identify the method: Are numbers or ranks used? |
| 2 | If using utils, apply formulas for total or marginal utility. |
| 3 | If using ranks, indicate order of preference or use indifference curves. |
| 4 | Draw conclusions based on whether satisfaction is being measured or ranked. |
Applications and Next Steps
Cardinal and ordinal utility concepts are essential for analyzing consumer choice, demand, and market behavior in economics. They are foundational for understanding related ideas such as consumer equilibrium, law of demand, and indifference curve analysis. Practice distinguishing between these two approaches is critical for tackling both objective and case-based questions in commerce exams.
For more structured resources, solved questions, and chapter notes, continue learning with Vedantu’s commerce classes and downloadable study materials.
FAQs on Difference Between Cardinal and Ordinal Utility in Economics
1. What is the main difference between cardinal and ordinal utility in economics?
The main difference lies in how satisfaction is measured. Cardinal utility assumes that the satisfaction a consumer gets from a good or service can be measured in absolute numerical units, called 'utils'. In contrast, ordinal utility states that satisfaction cannot be measured in numbers but can be ranked in order of preference. For example, a consumer can say they prefer an apple to a banana, but not by 'how much'.
2. Can you provide a simple example of both cardinal and ordinal utility?
Certainly. Here are examples for both:
- Cardinal Utility Example: If a student gets 20 utils of satisfaction from eating a chocolate bar and 10 utils from eating a biscuit, we can cardinally say that the chocolate bar provides double the satisfaction of the biscuit.
- Ordinal Utility Example: A student prefers listening to music over reading a book. Ordinally, they can rank music as their 1st preference and reading as their 2nd. However, they cannot assign a numerical value to how much more they enjoy music.
3. Why is the ordinal utility approach considered more realistic for analysing consumer behaviour?
Ordinal utility is considered more realistic because it mirrors how people actually make decisions. In real life, consumers rarely assign numerical values to their satisfaction. Instead, they make choices by comparing and ranking different options based on their preferences. This approach does not require the unrealistic assumption that satisfaction is a measurable quantity, making it a more practical and widely accepted tool in modern economics, particularly in indifference curve analysis.
4. What are the key analytical tools associated with each utility approach?
Each approach uses different analytical tools to study consumer behaviour:
- The cardinal utility approach is primarily associated with Marginal Utility Analysis. This tool helps in understanding concepts like the Law of Diminishing Marginal Utility and the Law of Equi-Marginal Utility.
- The ordinal utility approach uses Indifference Curve Analysis. This graphical tool shows various combinations of two goods that give a consumer the same level of satisfaction, allowing for a ranked comparison of preferences.
5. What are the major limitations of the cardinal utility approach?
The cardinal utility approach faces several significant limitations:
- Subjectivity: Utility is a psychological feeling that varies from person to person, making objective measurement impossible.
- No Standard Unit: The unit of measurement, 'util', is hypothetical and lacks a universal standard.
- Unrealistic Assumptions: It assumes the marginal utility of money is constant and that utilities of different goods are independent, which is often not true in reality.
- Interpersonal comparison: It is not possible to compare the utility one person gets with the utility another person gets from the same good.
6. What diagram is used to represent ordinal utility, and what does it show?
Ordinal utility is represented graphically using an Indifference Curve. An indifference curve is a graph that shows different combinations of two goods that provide a consumer with an equal level of satisfaction or utility. Every point on a single indifference curve represents a combination that the consumer is 'indifferent' to. Higher indifference curves represent higher levels of satisfaction, allowing for a clear, ranked visualisation of preferences without assigning any numerical values.
7. How does the concept of 'transitivity' apply to the ordinal utility approach?
Transitivity is a fundamental assumption of the ordinal utility approach, reflecting rational consumer behaviour. It states that if a consumer prefers Bundle A to Bundle B, and prefers Bundle B to Bundle C, then they must logically prefer Bundle A to Bundle C. This assumption ensures that consumer preferences are consistent and can be logically ranked, which is essential for constructing a coherent indifference map.
8. For a Class 11 student, what is the most important concept to understand about cardinal vs. ordinal utility?
For a Class 11 student, the most important concept to grasp is the evolution of economic thought from a less realistic to a more realistic model of consumer choice. Understand that cardinal utility was an early attempt to make economics a precise science by measuring satisfaction. However, its limitations led to the development of ordinal utility, which provides a more practical and logically sound framework (using indifference curves) to explain how consumers make choices based on ranking their preferences, as per the CBSE Class 11 Economics syllabus for 2025-26.
