In economics, cardinal and ordinal approaches to consumer behaviour determine the utility of a commodity or a service. In general, utility is a psychological incident that shows the favouring and satisfying strength of a service or product. It varies according to every individual.
What is Cardinal Utility?
The proposition that economic prosperity can be rightly perceived and provided with value is termed as a cardinal utility. Individuals can determine the use of certain products consumed. Cardinal utility prompts measuring of the satisfactory levels in utils.
It is necessary for economic well-being as it tries to set a value. Furthermore, allocative efficiency appears when the marginal cost becomes equal to marginal utility.
The supply and demand of a product decide its price. Moreover, a person’s desire for a product depends on these three factors:
Price of the item
Income of a person
The cost of other related items
Applications of Cardinal Utility
Under this structure production of goods and providing services are judged by the personal wealth of an individual. This means that it presents a way to comprehend the “greatest good to the greatest number of persons”. For example, by this act, a person’s utility decreases by 75 utils and increases two other persons’ each by 50 utils. However, the overall increase is 25 utils which is a positive offering.
In cardinal theory, a product’s marginal utility sign is alike for all the mathematical forms, but its magnitude is not same. This applies for second derivative of a differentiable utility as well.
Expected Utility Theory
This framework works for settlements that are to made under risks. Suppose there are a few lottery tickets that will provide outcomes. Here, it is possible to plot preferences in real numbers so that numerical representation can be done.
In various representations of utility, where people deduct the upcoming values of utility, cardinality comes into play. With the use of this, it is feasible to generate proper utility functions.
What is Ordinal Utility?
The function that represents utility of a product according to its preference, but does not provide any numerical figure, is known as an ordinal utility. In simpler words, this theory affirms that it is relevant to ask which item is better as compared to others instead of how good is that product. For example, a BMW car is favoured more than a Toyota car, but it cannot be determined by what percentage.
Apart from showing a mathematical function, a consumer’s preference can be demonstrated graphically through indifference curves. It becomes easy when there are two types of commodities x and y. Each indifference curve provides coordinates (x,y) when (x1, y1) and (x2, y2) lies on the same curve line and (x1, y1) ~ (x2, y2).
This is an example of an indifference curve map where the preference of goods are shown but not their quantity. Each of the curves represents a combination of two services or goods. The consumers are equally satisfied with the goods and services. The more distant a curve is from the origin, the higher its utility level.
Do you know: In 1934 John Hicks and Roy Allen produced the first paper which declared ordinal utility.
Here Is a Comparison Chart The Shows Ordinal vs Cardinal utility.
Fundamental Dissimilarities of Cardinal Utility and Ordinal Utility:
Cardinal utility is a function that determines the satisfaction of a commodity used by an individual and can be supported with a numeric value. On the other hand, ordinal utility defines that satisfaction of user goods can be ranked in order of preference but cannot be evaluated numerically.
The measuring term for cardinal and ordinal utility is utils and ranks respectively. Utils is the unit of utility and ranks determines the preference of a product compared to other products in the market.
Ordinal utility measures the utility of goods subjectively, but cardinal utility evaluates objectively.
Cardinal utility is not much realistic as compared to the ordinal one as quantitative evaluation of utility is not practicable. Ordinal utility depends on qualitative measurement, which makes it more realistic.
Another difference between ordinal and cardinal utility is that the former one is based on indifference curve analysis, and the latter is based on marginal utility evaluation.
Alfred Marshall and his admirers presented the cardinal utility approach, and Hicks and Allen pioneered the ordinal utility idea.
Another point that can be considered as a difference between cardinal and ordinal utility is that ordinal evaluation is sure to give outcomes. The ordinal utility is preferred more because it provides more robust results. Conversely, the concept of cardinal utility is obsolete, but still, it is used for contexts like discounted utilities, making settlements under risk and utilitarian welfare calculations.
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1. 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.
2. 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.
3. What Are The Two Approaches That Measure Utility?
Two approaches to measure utility are ordinal utility and cardinal utility.
4. What Are The Restrictions of Cardinal Utility?
Cardinal utility is used to evaluate the utility of a single product without considering the other commodities