The ultimate user of any product or service is the customer, and the producer's sole goal is to meet their requirements and wishes. However, the level of enjoyment varies depending on the individual and their mental state. The measuring of usefulness and satisfaction has long been a point of contention.
There are numerous ideas that characterize the level of enjoyment. However, the two most common utility theories are cardinal utility and ordinal utility. The cardinal utility argues that satisfaction can be measured in utils, but the ordinal utility believes that satisfaction cannot be evaluated but can be levelled.
This article shows the difference between cardinal utility and ordinal utility.
Cardinal vs Ordinal Utility
Many conventional economists advocated that utility be quantified in the same way that length, height, weight, temperature, and so on are. This is known as a Cardinal Utility. Ordinal Utility, on the other hand, expresses a commodity's utility in terms of more than or less than.
The primary distinction between cardinal and ordinal utility is that ordinal utility measures choices in terms of their order of preference, whereas cardinal utility assigns particular numerical values to a person's level of satisfaction after consuming a good or service.
Difference Between Cardinal Utility and Ordinal Utility in Tabular Form
|BASIS OF COMPARISON||CARDINAL UTILITY||ORDINAL UTILITY|
|Meaning||Cardinal utility is the utility that allows consumers' happiness from the consumption of a commodity or service to be stated quantitatively.||According to ordinal utility, the satisfaction that a consumer obtains from the use of an item or service cannot be represented numerically.|
|Realistic||It is less useful.||It is more realistic and logical.|
|Measurements||Utils are used to calculate utility.||Satisfaction is used to rank utility.|
|Promoted by||Economists of the classical and neoclassical schools.||Economists of Today.|
|Other Name||Utility Analysis.||Indifference Curve Analysis.|
What Is Cardinal Utility?
In the opinion of classical economists, utility is a quantitative concept that may be quantified. As a result, they developed the concept of assessing utility using a cardinal approach. According to this approach, the utility can be expressed in the same way as weight and height. The economists, on the other hand, lacked a specific measure for utility. As a result, they developed a psychological unit known as 'Util'. Because it changes from person to person, place to place, and time to time, util is not considered a standard unit. For example, if someone attributes 30 utils to a pizza and 20 utils to chowmein, we can deduce that the pizza has twice the capacity to satisfy human desires.
Because util is not a conventional unit of measurement, several economists, notably Alfred Marshall, proposed quantifying utility in terms of how much money people are willing to pay for an item. If one rupee equals one util, a pizza costing Rs 30 has 30 utils and a chow mein costing Rs 20 has 20 utils. As a result, consumers who eat burgers will generate 30 utils, whereas those who eat chow min will generate 20 utils.
A product's price is determined by its supply and demand. Furthermore, a person's demand for a product is influenced by three factors:
- The item's cost
- A person's earnings
- The cost of further connected products
Application of Cardinal Utility
Cardinal Utility's various applications are as follows:
Welfare Economics: In this system, the production of commodities and the provision of services are measured by an individual's own wealth. This means that it provides a means of understanding the "greatest good to the greatest number of people." For example, this conduct reduces a person's utility by 75 utils while increasing the utility of two other people by 50 utils each. However, the overall gain was 25 utils, which is a good deal.
Marginalism: According to cardinal theory, a product's marginal utility sign is the same for all mathematical forms, but its magnitude is not. This also holds true for the second derivative of a distinct utility.
Expected Utility Theory: This concept is useful for risk-adjusted settlements. Assume there are just a few tickets to the lottery that yield results. It is feasible to plot choices in real numbers here, allowing for numerical representation.
Intertemporal Utility: Cardinality comes into play in many representations of utility, where individuals deduce the impending values of utility. It is possible to generate appropriate utility functions using this.
Pros and Cons of Cardinal Utility
Cardinal utility has both advantages and disadvantages. Some of them are listed below:
- Precision: Cardinal utility provides a more accurate measurement of utility over ordinal utility. It enables us to assign numerical values to a person's level of happiness or utility from consuming a commodity or service, making it easier to evaluate utility between various products or services and even among different individuals
- Mathematical model: Cardinal utility can be used to develop mathematical models that aid economists and policymakers in understanding and forecasting consumer behavior. This is especially relevant for developing rules and regulations to maximize customer welfare.
- Consumer Surplus: Consumer surplus can be calculated using Cardinal Utility, which is the difference between the utmost price a consumer is ready to pay for an item or service and the actual amount they pay. This data can help businesses assess consumer demand and establish prices that maximize profits.
- Subjectivity: Cardinal utility is dependent on subjective judgements and preferences, which can differ from person to person and even over time within the same person. This makes using cardinal usefulness to make fair policy decisions challenging.
- Issues with measurement: Measuring utility and assigning numerical numbers to it can be difficult. Different people may interpret a specific degree of utility differently, and there is no unbiased method to measure it.
- Not observable: The utility is not immediately observable; thus, economists and policymakers must rely on indirect indicators like market prices and surveys to deduce consumer preferences and behavior. This can lead to mistakes and biases in utility measurement.
What Is Ordinal Utility?
The Ordinal Utility technique is based on the notion that an item's utility cannot be quantified in absolute quantity, but a customer can judge subjectively whether the commodity provides more, less, or equal satisfaction when compared to another.
Modern economics has abandoned the concept of cardinal utility in favor of an ordinal utility approach to studying consumer behavior. While neoclassical economics believed that utility could be quantified and stated in cardinal numbers, current economists feel that utility cannot be defined theoretically, mathematically, or even cardinally because it is a psychological phenomenon.
Hicks, a modern economist used the ordinal utility concept to investigate consumer behavior. He developed an analysis method called the "Indifference Curve" to study consumer behavior. An indifference curve is a set of points that represent alternative combinations of two replacements that provide the same amount of satisfaction and utility to the customer.
Types of Ordinal Utility
Ordinal usefulness is classified into two types:
Ranking-based ordinal utility: This type of ordinal utility assesses a consumer's choice for various goods or services based on their ranking. For example, if a consumer puts good A first, good B second, and excellent C third, this means that the consumer likes good A over good B and good B over good C.
Grading-based ordinal utility Grading-based ordinal utility evaluates a consumer's relative preference for different products or services based on the rating or amount of satisfaction they give to each good or service. For example, if a customer allocates an 8 to good A, a 6 to good B, and a 4 to good C, this means that the consumer prefers good A over good B and good B over good C. However, the absolute numbers of the grades are meaningless; only the relative variances between the grades are significant.
Pros and Cons of Ordinal Utility
- Ordinal utility theory is significantly easier to understand than cardinal utility theory, which attempts to assign numerical values to each degree of utility. Preference ranking is simpler to understand and compute.
- Ordinal utility theory seems more realistic since it does not require subjective satisfaction measurement. Instead, it acknowledges that people may be unable to communicate or even be conscious of the precise amount of utility they obtain from each alternative.
- Transitivity is assumed in ordinal utility theory, which states that if a person prefers option A to B and option B to C, they will pick option A to C. This is a valid assumption that contributes to the theory's consistency.
- No Cardinality premise: Ordinal utility theory doesn't rely on the premise that individuals' preferences can be expressed in cardinal numbers, which in practice can be an unreasonable assumption. As a result, the theory is more adaptable and relevant to a broader range of situations.
- Ordinal utility concepts can be easily applied to a wide range of decision-making scenarios, including ones in which the available options cannot be defined or assessed.
- Ordinal utility theory is more suited for normative assessment since it focuses on the order of choices, which is more important to policymakers than the actual degree of value.
- Theoretical utility theory does not provide an accurate estimation of the level of utility obtained from each option. This can be a drawback when comparing options with similar rankings.
- Ordinal utility theory simply offers information on the order of preferences and not the degree of the difference between them. This can help determine how much one choice is favored over another challenge.
- Comparing preferences across different persons or groups can be challenging because rankings may not be constant. Furthermore, comparing preferences across time can be difficult because people's preferences vary.
- Ordinal utility theory has low predictive power because it only offers data regarding the order of preferences rather than the number of differences between preferences. This can make accurate predictions regarding which option a person will choose challenging.
- Ignores preference interdependence: Ordinal utility theory implies that an individual's choices are independent of the preferences of others. In many cases, though, an individual's choices may be affected by the choices of others.
- Ordinal utility theory may not be appropriate for certain decision-making scenarios, such as those incorporating risk or uncertainty. Other decision-making theories, such as anticipated utility theory, may be more suited to these instances.
Key Differences Between Cardinal Utility and Ordinal Utility in Points
In terms of the distinction between cardinal and ordinal utility, the following points are worth noting:
- Cardinal utility is the utility that allows consumers' satisfaction from the consumption of a commodity or service to be quantified. According to ordinal utility, the enjoyment that a consumer obtains from the use of a product or service is immeasurable.
- Cardinal utility measures utility objectively, whereas ordinal utility measures utility subjectively.
- Cardinal utility is less realistic since quantitative utility assessment is impossible. Ordinal utility, on the other hand, is more realistic because it is based on qualitative measurement.
- Cardinal utility is determined via marginal utility analysis. The concept of ordinal utility, on the other hand, is founded on a curve of indifference analysis.
- The cardinal utility is measured in utils, which are units of utility. On the contrary, ordinal utility is determined in terms of a commodity's ordering of preferences when compared to each other.
- Alfred Marshall and his supporters proposed the Cardinal Utility Approach. Hicks and Allen, on the other hand, pioneered the ordinal utility approach.
Cardinal utility and ordinal utility are two utility theories. But the fundamental challenge was utility; in layman's terms, utility is customer happiness or that nice feeling that makes customers buy your product. Various economists developed theories, such as Alfred Marshall's cardinal utility theory and HICKS' ordinal utility theory. Although cardinal utility may appear to be very unrealistic because measuring feelings of satisfaction in numbers may appear to be an impossible thing, ordinal utility is a highly feasible approach, just like how normally consumers share their feelings about the item in question, this theory is a bit comparable which tells the amount of utility by words like more or less. Although ordinal utility does not provide an exact quantity like cardinal, it is nonetheless more commonly utilised in everyday life.