Major Difference Between Cardinal And Ordinal Utility Approach

What Is Cardinal Utility Approach?

Cardinal utility approach is propounded by neo-classical economists and is based on the assumption that the satisfaction or utility derived from consumption of a particular good and service is measurable and can be expressed cardinally or in absolute numbers.

The concept Cardinal utility approach to consumer behavior was first pioneered by Alfred Marshall, who believed that utility is measurable and the consumer can express his satisfaction in cardinal or quantitative numbers such as 1, 2, 3, 4, 5, 6 and so on.

In analysis of consumer behavior, cardinal utility approach assumes that the consumers are rational and they satisfy their wants in other order of their preference. This means that they will purchase those commodities first which yields the highest utility and then the second highest and so on. The concept also assumes that the utility is measurable and the utility derived from one unit of the commodity is equal to the amount of money, which a consumer is ready to pay for it i.e 1 Util=1 Unit of money.

According to this theory of consumer behavior, the consumer has limited money to spend on the purchase of goods and services and thus this makes the consumer buy those commodities first which are a necessity. It is also assumed that the marginal utility of money remains constant irrespective of the level of a consumer’s income.

What You Need To Know About Cardinal Utility Approach

1. Cardinal utility explains that the satisfaction derived by the consumers from the consumption of goods or services can be measured numerically.
2. The concept of Cardinal utility approach was pioneered by Alfred Marshall.
3. In cardinal utility it is assumed that consumers derive satisfaction through consumption of one good at a time.
4. Cardinal utility is measured in terms of units of utility (Utils). Utils help in understanding how much utility is derived from consumption of a product.
5. The cardinal utility is based on marginal utility analysis.
6. The cardinal utility measures the utility objectively.
7. The cardinal utility is less realistic as quantitative measurement of utility is not possible.
8. The concept of cardinal utility is promoted by classical and Neo-classical Economists.
9. Cardinal approach brings out the preference of one product over other through Utils but this does not imply any conclusion or relation between the choices.
10. Example of cardinal utility: Donald Trump submits that Burger gives him 60 Utils of satisfaction whereas Pizza gives him only 40 Utils.

What Is Ordinal Utility Approach?

The concept of Ordinal utility approach was pioneered by Prof John R Hicks. The approach is based on the ground that utility of a commodity cannot be measured in absolute quantity, but however, it will be possible for a consumer to tell subjectively whether the commodity derives more or less or equal satisfaction when compared to another.

The ordinal utility approach is most often propounded by modern economists who believe that utility being the psychological phenomenon cannot be measured theoretically, quantitatively and even cardinally.

The ordinal utility theory of consumer behavior assumes that the consumer is a rational being who aims at maximizing his level of satisfaction for given income and prices of goods and services, which he wish to consume. He is expected to make decisions that are consistent with his objective. The theory also assumes that the consumer has not reached the saturation point of any commodity and hence he prefers larger quantities of all commodities.  

Ordinal utility approach gives a sense of preferences, likes and dislikes but there is no numerical measurement and this approach is used in grading the preferences of consumer depending upon the alternatives that are available to him or her.

What You Need To Know About Ordinal Utility Approach

1. Ordinal utility explains that the satisfaction which a consumer derives from the consumption of product or service cannot be measured numerically.
2. Ordinal utility approach was pioneered by Prof John R Hicks.
3. In ordinal utility, a consumer may derive satisfaction from the consumption of a combination of goods and services.
4. The ordinal utility is measured in terms of ranking of preferences of a commodity when compared to each other.
5. The concept of ordinal utility is based on indifference curve analysis. The indifference curve assumes that the utility can only be expressed ordinally.
6. The concept of ordinal utility measures utility subjectively.
7. The ordinal utility is more realistic as it relies on qualitative measurement.
8. The ordinal utility concept is promoted by modern economists.
9. Ordinal utility approach gives a sense of preferences, likes and dislikes but there is no numerical measurement and this approach is used in grading the preferences of consumer depending upon the alternatives that are available to him or her.
10. Example of ordinal utility: Donald Trump submits that he gets more satisfaction from Burger as compared to Pizza.

Also Read: Difference Between Balance Of Trade And Balance Of Payment

Difference Between Cardinal And Ordinal Utility Approach In Tabular Form

Why Is Ordinal Utility Is Considered More Realistic?

The ordinal utility is often considered to be realistic when compared with Cardinal utility approach because of the following reasons:

• It avoids the unrealistic assumption of cardinal utility and instead adopts the concept of qualitative measurement.
• It can be used to split the price effect into the substitution and income effects.
• It is not based on the unrealistic assumption of constant marginal utility of money.

Similarities Between Ordinal And Cardinal Utility Approach

• Both approaches represent the common human behavior based upon psychology and they lack any type of statistical data.
• Both approaches approach assumes is rational and is well aware of his income and the prices of goods prevailing in the market and want to maximize satisfaction.