CARDINAL AND ORDINAL UTILITY

Utility
People buy goods because they get satisfaction from them. This satisfaction which the consumer experiences when he consumes a good or service, when measured is called utility. Jevon (1835 -1882) was the first economist who introduces the concept of utility in economics. According to him: "Utility is the basis on which the demand of a individual for a commodity depends upon".

Utility is the total satisfaction which is received by a consumer from consuming a good or service. Utility is taken to be co-relative to desire or want.

Some examples for Utility

Note : Human wants are unlimited It differs from person to person. The utility is subjective in nature.

Cloth has a utility for us because we can wear it. Food has a utility for us because everyone eats it. The utility of a bottle of wine is zero for a non-alcoholic person while it has very high utility for a person who loves alcohol. The utility of books for a book lover will be high in comparison to someone who doesnt love to read books. Poison is injurious to health but it gives subjective satisfaction to a person who wishes to die.

Cardinal Utility and Ordinal Utility

The word cardinal means quantitative measurement

Neo Classical Economists believed that utility is cardinally measurable like height, weight, length, temperature and air pressure. This belief resulted in cardinal utility concept.

Ordinal Utility refers to the comparative preference utility of a commodity over its substitute.

According to this concept it is possible to list goods and services in order of preferability or desirability. One person prefers chocolate > ice cream > cold drinks but cannot express his preference in quantitative terms. This concept is called ordinal utility concept.

Assumptions of Cardinal Utility Analysis:

The main assumption or premises on which the cardinal utility analysis rests are as under.

(i) Rationality - The consumer is rational. He seeks to maximize satisfaction from the limited income which is at his disposal.
(ii) Utility is cardinally measurable - The utility can be measured in cardinal numbers such as 1,3,10,15, etc. The utility is expressed in imaginary cardinal numbers tells us a great deal about the preference of the consumer for a good. (iii) Marginal utility of money remains constant - Another important premise of cardinal utility of money spent on the purchase of a good or service should remain constant. (iv) Diminishing marginal utility - It is also assumed that the marginal utility obtained from the consumption of a good diminishes continuously as its consumption is increased.

(v) Independent utilities - According to the Cardinalist school, the utility which is derived from the consumption of a good is a function of the quantity of that good alone. If does not depend at all upon the quantity consumed of other goods. The goods, we can say, possess independent utilities and are additive. (vi) Introspection method - The Cardinalist school assumes that the behavior of marginal utility in the mind of another person can be judged with the help of self observation. For example, I know that as I purchase more and more of a good, the less utility I derived from the additional units of it. By applying the same principle, I can read other people mind and say with confidence that marginal utility of a good diminishes as they have more units of it.

Assumptions of Ordinal Utility Analysis:

Rational behavior of the consumers - It is assumed that individuals are rational in making decisions from their expenditure on consumer goods. Utility is ordinal the consumer can rank the basket of goods according to the satisfaction or utility of each basket but cannot quantify the utility cardinally. Diminishing marginal rate of substitution how he prefers one commodity over another to maintain the same level of satisfaction. Nonsatiety it is assumed that the consumer is never over supplied with goods at any point. That is, he has not reached the point of saturation in case of any commodity. Therefore, a consumer always prefers a lager quantity of all the goods.

Consistency in choice consumer in consistent in his behavior and preferences during a period of time. Consumers preference is not self-contradictory It is assumed that a consumer will not contradict his own preferences. Eg If a person prefers chocolate over icecream and ice-cream over coffee then it is taken that he certainly prefers chocolate over coffee. Goods consumed are substitutable It is assumed that all goods that perform in a market are completely substitutable. People who are addicted to a particular commodity will be an exception to ordinal utility concept as he can never prefer something else over that particular commodity.