Difference Between Cardinal and Ordinal Utility

1182 words 5 pages
Introduction.

QN:A We all know that consumer is the one who uses goods and services to satisfy his/her wants.
She /he is assumed to be rational meaning that he/she earns at utility maximization, giving his/her income and commodity prices.
There several theories that have been developed to try and explain the behavior of a consumer, however they can be categorized in to two:
 Cardinal utility theory:- it argues that a consumer has the capacity to measure the level of satisfaction that she derives from consumption of a given quantity of a commodity.
 Ordinal utility theory:- it argues that a consumer cannot measure satisfaction numerically or subjectively instead she can rank the different baskets or bundles so as to choose the best
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In the above example ,it would only be possible to say that juice is preferred to tea to water, but no more.

QN:B Assumption of Ordinal Utility
The ordinal utility approach to consumer behavior is built on the following assumption;-

i. Ordinal Utility is meaning that , a consumer can arrange her preferences according to the order of satisfaction that she /he derives from each basket , she /he does not need to know exactly the amount of satisfaction which she /he derive from each basket instead what is necessary is to know the satisfying power of each basket. For instance a consumer can say precisely that basket A gives her more satisfaction than B with out requiring her to measure numerically the amount of satisfaction.

ii. A consumer is assumed to be rational this means that she aims at maximizing satisfaction given her income and the commodity prices and will always choose the basket that gives her the greatest level of satisfaction.

iii. The theory assumes consumption of at least two commodities.

iv. That total utility of a consumer depends on the different quantities consumed by her that is U=U(x1.x2…xn) where 1,2……n are the n commodities.

v. It assumes diminishing marginal rate of substitution the slope of an indifference curve is known as marginal rate of substitution (MRS) and it shows the rate at which the consumer is willing to substitute commodity say X for other good Y.

vi. It assumes

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