Cardinal vs Ordinal Utility: Understanding the Differences in Economics
Utility is the ability of a good or service to satisfy a person's needs or desires. It can vary from person to person because it depends on their mindset. Measuring utility is a topic that often causes debate. There are two main theories about utility: Ordinal Utility and Cardinal Utility. Some economists believe utility can be measured in specific amounts, like length, height, weight, or temperature. This idea is called Cardinal Utility. On the other hand, Ordinal Utility compares how much more or less useful one item is compared to another. Read the article below to learn more about the difference between Cardinal and Ordinal Utility.
What is an Ordinal Utility?
Ordinal Utility states that the satisfaction a consumer derives from consuming goods or services cannot be measured numerically but can be ranked based on preference. Introduced by English economists John Hicks and R.J. Allen in 1934, this theory argues that consumer behavior should focus on preference order rather than quantifiable utility.
Utility is a subjective concept, reflecting psychological factors like happiness and satisfaction, which vary among individuals and cannot be expressed in exact numbers. Instead, ordinal utility evaluates which item is preferred over another rather than how much better it is.
A consumer’s preferences can be represented mathematically or graphically through indifference curves. These curves illustrate combinations of two goods (x, y) that provide the same satisfaction level. Curves farther from the origin represent higher utility levels. Preferences are ranked in relative terms like “better” or “worse.” For example, a consumer may rank a BMW above a Toyota without quantifying the difference.
What is Cardinal Utility?
Classical economists viewed utility as a measurable concept, introducing the cardinal approach to quantify it. They proposed a psychological unit called a "Util" to express utility, similar to how weight or height is measured. For example, if a pizza is assigned 30 utils and chow mein 20 utils, it suggests the pizza provides twice the satisfaction. However, "Util" is not a standard unit as it varies across individuals, places, and times.
Economists like Alfred Marshall proposed measuring utility in monetary terms. If 1 rupee equals 1 util, a pizza priced at ₹30 provides 30 utils, and chow mein priced at ₹20 provides 20 utils. Thus, utility reflects the satisfaction a consumer gains relative to the money spent.
The demand for a product and its price depend on:
The product's price.
The consumer’s income.
Prices of related goods.
Distinguish Between Cardinal and Ordinal Utility
Key Difference Between Cardinal Utility and Ordinal Utility
Cardinal Utility refers to measuring the satisfaction or pleasure a person gets from a product using numbers. This means the satisfaction level can be measured and expressed numerically. On the other hand, Ordinal Utility looks at how people rank their satisfaction with goods, but it doesn't assign any numbers to that satisfaction.
The unit of measurement for Cardinal Utility is called "utils," while Ordinal Utility uses "ranks" to show the order of preferences. "Utils" measures satisfaction directly, while "ranks" simply show which product is preferred over another.
Cardinal Utility evaluates satisfaction in a more objective way, while Ordinal Utility is more subjective. Cardinal Utility can be unrealistic because it's hard to measure satisfaction precisely with numbers. On the other hand, Ordinal Utility is based on qualitative preferences, which makes it more practical.
Another difference is that Cardinal Utility uses marginal utility to measure satisfaction, while Ordinal Utility relies on the concept of indifference curves. The Cardinal Utility theory was developed by Alfred Marshall, while the Ordinal Utility theory was introduced by Hicks and Allen.
Ordinal Utility is more reliable because it provides clearer outcomes. Although Cardinal Utility is considered outdated, it's still used in some areas, like calculating welfare or in situations with risks.
Conclusion:
Cardinal and Ordinal Utility are two important concepts in economics. Cardinal Utility assigns a numeric value to the satisfaction from different products, helping consumers rank their preferences by magnitude. Ordinal Utility only ranks products by preference without giving a specific value to satisfaction. To better understand these concepts, you can explore more on platforms like Vedantu and join their online classes.
FAQs on Difference Between Cardinal and Ordinal Utility
1. What defines the utility?
Utility is a feeling of satisfaction, pleasure, or well-being that a person experiences when using a product or service. It is a personal and individual concept, meaning the level of satisfaction a product gives can vary from person to person. For instance, vegetarians may not find any benefit in eating meat.
2. What are the different issues that arise in the cardinal measurement of utility?
There are several difficulties involved in the measurement of utility. This is due to the fact that utility derived by the consumers from a commodity relies on several factors like changes in consumer’s tastes and preferences, mood, etc. These factors are not possible to calculate while measuring Cardinal Utility.
3. What are the basic assumptions of the ordinal approach?
The basic assumption of the ordinal approach are:
Rational: This assumption implies that the consumer prefers more to less and tries to maximize his satisfaction.
Transitivity: This assumption implies that if a consumer prefers X to Y and Y to Z, then he prefers X to Z, or if she treats X > Y and Y > Z, then she also treats X > Z.
Consistency: This assumption implies that if a consumer prefers X over Y product in one period, he/she will not prefer Y over X in another period.
Non satiety: This assumption means that a consumer prefers to have a larger quantity of all the goods over smaller quantities of the same.
Diminishing Marginal Rate of Substitution (MRS): MRS is the rate at which a consumer is willing to substitute one commodity (say X) for another commodity (say Y) while maintaining the same utility or level of satisfaction.
4. Define cardinal utility.
The function that determines the user satisfaction of a product which can be calculated and expressed in numbers is known as a Cardinal Utility.
5. Define ordinal utility.
The concept of Ordinal Utility expresses user satisfaction of numerous items according to their preference but cannot be supported with a value.
6. What are the two approaches that measure utility?
Two approaches to measure utility are Ordinal Utility and Cardinal Utility.
7. What are the restrictions of cardinal utility?
Cardinal Utility is used to evaluate the utility of a single product without considering the other commodities.
8. What is the primary difference between Cardinal Utility and Ordinal Utility?
Cardinal Utility quantifies satisfaction in measurable units (utils), while Ordinal Utility ranks preferences without assigning numerical values.
9. How does Cardinal Utility differ from Ordinal Utility in practical application?
Cardinal Utility assumes satisfaction can be measured numerically and is less realistic, while Ordinal Utility focuses on preference ranking, making it more applicable to real-world consumer behavior.
10. Why is Ordinal Utility considered more realistic than Cardinal Utility?
Ordinal Utility reflects subjective consumer preferences and ranks them qualitatively, avoiding the unrealistic assumption that utility can be precisely measured.
11. What are the key assumptions underlying Cardinal Utility and Ordinal Utility?
Cardinal Utility: Assumes utility is measurable, rational behavior, and diminishing marginal utility.
Ordinal Utility: Assumes rationality, transitivity, consistency, and diminishing marginal rate of substitution.
12. Can you distinguish between the evaluation methods of Cardinal Utility and Ordinal Utility?
Cardinal Utility uses numerical measurement (utils), while Ordinal Utility employs ranking systems to assess consumer satisfaction.
13. What is the role of Marginal Utility Analysis in Cardinal Utility?
Marginal Utility Analysis evaluates how satisfaction changes with the consumption of one additional unit of a product, forming the core of Cardinal Utility theory.
14. How does Indifference Curve Analysis relate to Ordinal Utility?
Indifference Curve Analysis graphically represents combinations of goods providing equal satisfaction, a central concept of Ordinal Utility.
15. What is the relationship between Cardinal Utility and consumer behaviour?
Cardinal Utility explains consumer behaviour by quantifying satisfaction, often assuming diminishing marginal utility for successive units of consumption.
