The utility can be defined as a psychological phenomenon which shows the rewarding influence of a commodity or a service. It varies from person to person because it relies on an individual’s mental disposition. It is necessary to measure the utility.
The two different ideas of utility are ordinal and cardinal utility. The ordinal utility helps express a product’s use by comparing it with other products.
On the other hand, the cardinal utility helps measure the product’s utility with the help of the product’s weight, length, temperature, etc.
Key Takeaways
- Cardinal utility measures the satisfaction or utility derived from consuming a particular good or service, expressed numerically.
- Ordinal utility measures the relative ranking or preference of different goods or services without reference to specific numerical values.
- Cardinal utility assumes that utility can be measured and compared quantitatively, while ordinal utility assumes that utility can only be ranked in order of preference.
Cardinal vs Ordinal Utility
Cardinal utility is a method of measuring utility or the satisfaction that a consumer derives from consuming a good or service using numerical values. Ordinal utility does not use numerical values to measure utility. Instead, it focuses on the relative ranking or ordering of preferences.
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Cardinal utility was introduced by classical and neo-classical economists, whereas ordinal utility was come into existence by modern economists.
Comparison Table
| Parameter of Comparison | Cardinal Utility | Ordinal Utility |
|---|---|---|
| Proposed By | Marshal | JR Hicks & Allen |
| Realistic | Less | More |
| Measurable | Yes | No |
| Approach | Quantitative | Qualitative |
| Analysis | Marginal Utility | Indifference Curve |
| Promoted by | Neo-classical economists | Modern economists |
| Expressed | Can be expressed numerically | Cannot be expressed numerically |
| Measurement of satisfaction | Cardinal utility is measured in ‘Utils.’ | No such Units |
| Theories Followed | Marginal Utility | Indifference Curve Analysis Budget Line |
| Nature | Psychological | Real & Comparable |
What is Cardinal Utility?
The Cardinal Utility approach is given by the neo-classical economist Marshal, who claimed that the utility of a commodity could be measured.
He said the user could show their satisfaction level in numerical forms, such as 1, 2, 3, etc. Also, according to this procedure, the utility can be expressed in a very similar way as we describe the height and weight of a product.
The neoclassical economist also established this theory based on assuming the value of a product. Apart from this, the cardinal utility is not realistic as it is impossible to measure the utility of a product.
Marshal created a unit of measurement known as “Utils” to make the numbering of utilities possible. A single ‘Util’ equals one rupee, and the use of money remains static.
With time, it has been realized that the measurement of the utility of a product is not at all possible. It is a bit difficult to quantify the use of a product. You cannot explain the likes and dislikes of a product in numbers.
The utility derived from the subsequent units of a product is decreasing. In other terms, the cardinal utility of a product falls when the user acquires larger quantities of it.
Advantages
The theory of cardinal utility helps each of us to have an opinion regarding the utility of a product in different ways. Cardinal Value is the belief that economic benefits can be directly measured and valued.
The concept of cardinal utility is relevant to the rational choice theory. It says that customers make the best decisions to optimize their utility.
What is Ordinal Utility?
It was proposed by a modern economist named R.G.D.Allen and J.R.Hicks. The Ordinal Utility is based on the theory that the utility of a product cannot be determined in complete quantities.
Therefore, the customer can express it in ordinal terms. It is based upon the fact that whether the service they are using is giving them pleasure or not.
Modern economists have dismissed the idea of cardinal value and have instead adopted an ordinal utility method to study customers’ behaviour.
Although neoclassical economists claim that the utility can be calculated and represented with the help of cardinal numbers, modern economists suggest that psychological phenomena cannot be assessed objectively, quantitatively, or even numerically.
If explained, the measurement of utility is ordinal is qualitative, based on the ranking of the product’s tastes.
For example, suppose someone prefers mango over apple and orange. Then this person can rank his/her preferences as mango > apple > orange.
The modern economist Hicks used the ordinal utility principle to research consumer behaviour. He launched an analysis tool called the “Indifference Curve” to evaluate the user’s behaviour.
This indifference curve refers to the locus of points; each shows the different combinations of two substitutes that give the consumer the same level of satisfaction and benefit.
Advantages
The ordinal utility follows a single product analysis in which the utility of one element is assumed to be independent of the other. Alfred Marshall stopped addressing alternatives and complementary products by bringing them together as one product.
The indifference curve strategy in ordinal utility is a two-product analysis addressing consumer behaviour in alternative products.
It is, therefore, equivalent to the study of utility analysis. Also, it provides a better classification of alternative products.
Main Differences Between Cardinal and Ordinal Utility
- Cardinal utility can be measured numerically, whereas ordinal utility cannot be expressed numerically.
- ‘Utils’ is the cardinal utility unit used to measure it, whereas the ordinal has n such units. Instead, it is measured with the help of ranking the priority each product has in your life when compared to each other.
- Alfred Marshall and his supporters give the cardinal utility method. Likewise, the ordinal utility method is given by Allen & JR Hicks.
- Cardinal utility is focused on the study of marginal utility. In contrast, the ordinal utility theory is based on the study of indifference curve analysis.
- Cardinal utility is less practical, as it is not possible to calculate the quantitative utility of every product. On the other hand, the ordinal utility is more realistic because it relies on qualitative measurement.
- The ordinal utility claims that the contentment that the customer derives after using a product or service can’t be measured numerically. Cardinal utility is the utility in which the satisfaction derived by users from consuming goods or services can be expressed numerically.
- https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1536-7150.2005.00394.x
- https://ieeexplore.ieee.org/abstract/document/4308741
- https://kylewoodward.com/blog-data/pdfs/references/may-econometrica-journal-of-the-econometric-society-1954A.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
