Difference Between Cardinal and Ordinal Utility

Cardinal and Ordinal Utility: Utility is a physiological fact that signifies a desire for an item or service's fulfilling power. It varies from person to person since a person's mental attitude determines it. Utility measurement has long been an issue of contention. Cardinal and Ordinal Utility are the two main utility theories. Many traditional economists proposed that the cardinal utility be measured in the same manner as length, height, weight, temperature, etc. On the other hand, Ordinal utility represents a commodity's usefulness in terms of greater than or less than.

What is Cardinal Utility?

Cardinal utility is a concept in economics that helps us understand how individuals assign numerical values to the satisfaction or happiness they derive from consuming goods and services. This numerical representation of utility enables economists to analyze and make predictions about people's preferences and choices in a more precise and systematic manner.

In simpler terms, cardinal utility is like giving a numerical score to how much someone enjoys something. For example, if you like ice cream, you might rate the pleasure you get from eating it as an 8 on a scale from 1 to 10. This numerical rating allows economists to compare your enjoyment of ice cream to your enjoyment of other things, like cake or pizza.

Features of Cardinal Utility:

Here are some essential features of cardinal utility:

• It is assumed that utility may be assessed and stated using cardinal numbers like 1, 2, 3, and so on.
• The notion depends on the idea that a product or service's utility may be quantified in absolute terms.
• It is used to quantify the overall pleasure derived by a customer from consuming a given amount of a commodity or service.
• According to the Cardinal Utility Theory, a customer may make a reasonable choice to maximize their utility.
• The idea is sometimes related to the law of declining marginal utility, which asserts that as the amount consumed rises, the value obtained from each extra unit of an item or service declines.
• It serves as the foundation for a number of economic theories and models, including consumer demand theory and pricing theory.
• The notion is often employed in welfare economics, which aims to measure the total degree of societal well-being using the cardinal utility.
• The price a customer is prepared to pay for an item or service might indicate its usefulness.
• It is a fundamental idea in utilitarianism and neoclassical economics.
• Despite its importance, determining the precise measurement of utility has proved difficult.

What is Ordinal Utility?

Ordinal utility is a concept in economics that allows us to rank and compare preferences without assigning specific numerical values to them. Instead of measuring utility on a numerical scale, ordinal utility focuses on establishing the order of preference or ranking among various goods and services.

In simpler terms, ordinal utility is like saying, "I like apples more than bananas," without specifying how much more. It doesn't assign numerical values like 7 or 8; it simply recognizes that one option is preferred over the other.

Features of Ordinal Utility:

Ordinal Utility is a qualitative method for analyzing customer behavior. Following are some of its key features:

• Consumers rate their preferences depending on how satisfied they are after using a product or service.
• Ordinal utility, unlike cardinal utility, does not need utility to be measured in quantifiable units.
• The ordinal utility is deemed more realistic since it recognizes that measuring pleasure quantitatively is challenging.
• Indifference curve analysis, a key method in microeconomics, employs the idea of ordinal utility.
• According to the ordinal utility theory, if a customer likes good A over good B and excellent B over good C, the consumer would choose good A over good C.

Cardinal and Ordinal Utility Differences

There are two primary approaches to measuring utility: cardinal and ordinal utility. Below is a comparison in tabular form to highlight the key distinctions between cardinal and ordinal utility:

Similarities Between Cardinal and Ordinal Utility

The following are some similarities between Cardinal and Ordinal Utility:

• Fundamental to consumer behavior: Both theories are used to examine how consumers make decisions and how those decisions influence the demand for products and services.
• Include ranking: Consumers rate their preferences for various products and services in both cardinal and ordinal usefulness.
• Based on the rationality assumption: Both theories assume that customers are rational and want to maximize their pleasure.
• Both cardinal and ordinal utility incorporates the idea of marginal utility, which refers to the pleasure that a customer obtains by consuming an extra unit of an item or service.
• In demand analysis, both cardinal and ordinal utility are utilized to determine how price and income changes impact consumer demand.