Difference Between Cardinal and Ordinal Utility (With Table)

Cardinal utility was introduced by classical and neo-classical economists, whereas ordinal utility was come into existence by modern economists.

Comparison Table Between Cardinal and Ordinal Utility

What is Cardinal Utility?

The Cardinal Utility approach is given by the neo-classical economist named Marshal who claimed that the utility of a commodity can be measured.

He said that the user can show the level of their satisfaction in the numerical form, 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.

In order to
make the numbering of utility possible, Marshal created a unit of
measurement which is known as “Utils”. A single ‘Util’ is equal
to 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 is proposed by the 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, it is possible for the customer to express it in ordinal terms. It is based upon the fact that whether the service they are using is giving them pleasure or not.

The modern economists have dismissed the idea of cardinal value and have instead adapted an ordinal utility method to the study of the behavior of the customers.

Although neoclassical economists claim that the utility can be calculated and represented with the help of the cardinal numbers, modern economists suggest that the psychological phenomena cannot be assessed objectively, quantitatively, or even numerically.

If
explained simply, the measurement of utility is ordinal is qualitative,
based on the ranking of the product’s tastes. For example, suppose someone
prefers to have mango over apple and then orange. Then this person can
rank his/her preferences as mango > apple > orange.

In fact, the modern economist Hicks used the ordinal utility principle to research consumer behavior. He launched an analysis tool called the “Indifference Curve” to evaluate the behavior of the user.

This indifference curve refers to the locus of points, each of them shows the different combinations of two substitutes that give the same level of satisfaction and benefit to the consumer.

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 which addresses the consumer behavior in case of alternatives products.

It is therefore equivalent to the study of the utility analysis. Also, it provides a better classification of alternative products.

Main Differences Between Cardinal and Ordinal Utility

1. Cardinal utility can be measured numerically, whereas ordinal utility cannot be expressed numerically.
2. ‘Utils’ is the unit of cardinal utility and is used to measure it, whereas the ordinal has n such units. Rather it is measured with the help of the ranking of the priority that each product has in your life when compared to each other.
3. The cardinal utility method is given by Alfred Marshall and his supporters. Likewise, the ordinal utility method is given by Allen & JR Hicks.
4. Cardinal utility is focused on the study of marginal utility. In contrast, the theory of ordinal utility is based on the study of indifference curves analysis.
5. 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.
6. 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 the consumption of goods or services can be expressed in a numeric way.

Conclusion

These two approaches to the demand analysis mentioned above are not in contest with each other, but instead, they represent two different levels of intellect during the analysis of consumer behavior.

Both the ordinal and cardinal utility are essential for the estimation and measurement of consumer demand for a product or service. In total, the ordinal utility is more acceptable when compared to the cardinal utility.

References

1. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1536-7150.2005.00394.x
2. https://ieeexplore.ieee.org/abstract/document/4308741
3. https://kylewoodward.com/blog-data/pdfs/references/may-econometrica-journal-of-the-econometric-society-1954A.pdf