Introduction to cardinal and ordinal utility

Utility is central to understanding consumer behavior, and economists have developed two main approaches to measure or express it: the Cardinal Approach and the Ordinal Approach.

1. Cardinal Approach: Measuring Utility in Numeric Terms

The Cardinal Approach assumes that utility can be measured quantitatively, much like weight, height, or temperature. It uses specific numerical values, referred to as “utils,” to represent the satisfaction derived from consuming goods or services.

The Cardinal Utility Approach, developed by Alfred Marshall, is based on the idea that utility can be measured in absolute numbers (like 1, 2, 3 utils). The following are its core assumptions:

Measurable Utility:
- Utility derived from a commodity can be quantified in numeric terms using hypothetical units called utils.
- For example, if an apple gives 10 utils and a banana gives 5 utils, it implies that the apple gives twice the satisfaction of the banana.
Rational Consumer:
- The consumer is rational and aims to maximize total satisfaction given their limited income and commodity prices.
Diminishing Marginal Utility:
- The Law of Diminishing Marginal Utility holds true: as more units of a good are consumed, the additional utility from each successive unit declines.
Constant Marginal Utility of Money:
- The utility derived from each rupee (or unit of money) remains constant, even as the consumer spends it on various goods.
Independent Utilities:
- The utility from one good is independent of the consumption of another good.
- For instance, the utility of tea is unaffected by whether coffee is consumed or not.
Additive Utility:
- The total utility of a bundle of goods is simply the sum of the individual utilities derived from each good.

Key Principles of the Cardinal Approach:

Law of Diminishing Marginal Utility:
- This principle states that as a person consumes more units of a good, the added satisfaction (or marginal utility) gained from each additional unit decreases.
- Example: The first slice of pizza might bring immense joy, the second a bit less, and by the fifth or sixth slice, you might even feel indifferent or full, reducing additional satisfaction.
Law of Equi-Marginal Utility:
- According to this principle, a consumer achieves maximum total satisfaction by allocating their income across goods in such a way that the marginal utility per unit of cost (MU/Price) is equal for all goods.
- Example: If buying one more slice of pizza gives you 5 utils per dollar and one more burger gives you 7 utils per dollar, you should shift spending to the burger until the utils per dollar are balanced.

Limitations of the Cardinal Approach:

Measuring utility in precise numerical terms (like utils) can be impractical and subjective.
Satisfaction or happiness isn’t always comparable across individuals.

2. Ordinal Approach: Ranking Preferences without Numbers

The Ordinal Approach takes a simpler view, arguing that utility doesn’t need to be measured in exact numbers. Instead, consumers can rank their preferences to express satisfaction levels, similar to creating a “Top 10” list of favorite things.

Key Features of the Ordinal Approach:

Ranking Over Measurement:
- Instead of assigning specific values to satisfaction, consumers indicate the order of their preferences.
- Example: If a consumer prefers apples to bananas and bananas to oranges, they rank them in this order: Apples > Bananas > Oranges. The focus is on preference, not how much more one good is liked than another.
Indifference Curves:
- The ordinal approach uses indifference curves to represent combinations of goods that provide the same level of satisfaction.
- Example: A consumer might be equally satisfied with either 2 apples and 3 bananas or 4 apples and 1 banana, and these combinations would lie on the same indifference curve.

Advantages of the Ordinal Approach:

It avoids the impracticality of assigning numeric values to utility.
It reflects consumer behavior more realistically, focusing on relative preferences.

Aspect	Cardinal Approach	Ordinal Approach
Utility Measurement	Measures utility in numeric terms (utils).	Ranks preferences without numeric values.
Focus	Absolute satisfaction from goods.	Preference order between goods.
Tool Used	Utils and Marginal Utility.	Indifference Curves.
Practicality	Less practical due to exact measurement.	More realistic as it avoids precise numbers.

Introduction to cardinal and ordinal utility