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 difference between cardinal and ordinal utility in points?
Cardinal utility measures satisfaction with actual numbers, while ordinal utility ranks preferences without assigning specific values.
- Cardinal utility quantifies utility
- Ordinal utility uses ranking
- Cardinal approach gives precise differences
- Ordinal only shows order of preferences
2. What is the difference between cardinal and ordinal with an example?
In cardinal utility, someone may say "eating pizza gives me 10 units of satisfaction, and ice cream gives 6 unique units." In ordinal utility, the same person would only say, "I prefer pizza to ice cream," showing only the order, not the amount of utility.
3. What are some examples of ordinal utility?
- Choosing an apple over a banana
- Preferring walking to cycling
- Liking math over history
4. What is an example of cardinal approach of utility?
A classic cardinal approach example is someone saying they get 20 utils from eating chocolate and 10 utils from eating chips. Here, satisfaction is measured in numbers, showing that chocolate gives exactly twice the utility of chips in the utility framework.
5. Can cardinal utility be measured exactly?
According to cardinal utility theory, utility can be measured in exact units like "utils." However, in real life, it is often difficult to assign precise numeric values to personal satisfaction because utility is subjective for each consumer.
6. Why is ordinal utility more realistic than cardinal utility?
Ordinal utility is often more realistic because people naturally rank preferences but find it hard to measure satisfaction in exact numbers. It reflects how consumers make choices in real situations, by simply ordering what they like more or less.
7. How does cardinal utility utility help in consumer analysis?
Using cardinal utility, economists can analyze how much more satisfaction a consumer gets from one option compared to another. This allows calculation of
- marginal utility
- total utility
- consumer equilibrium
8. What key assumptions are made in cardinal utility theory?
The cardinal utility theory assumes utility can be measured objectively in numbers, each unit is identical, and that satisfaction from consumption is independent of other goods. It also assumes utility can be added and compared between goods for meaningful analysis.
9. What role does ranking play in ordinal utility?
Ordinal utility only requires consumers to rank preferences from most-liked to least-liked. This approach does not need actual numbers; it simply uses the order of choices to understand consumer behavior and decisions in economic analysis and theory.
10. Can ordinal utility measure the difference between two options?
No, ordinal utility cannot measure how much more one option is preferred over another. It only shows the order of choices, not the magnitude of utility differences. The focus in ordinal theory is on ranking and not on numerical values.
