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 basket.
Difference between cardinal and ordinal utility
The basic concept in this approach is utility which refers to satisfy power that a good or service consumed possesses in this approach, it is assumed that a consumer assigns a cardinal major which can be counted .
This means that a consumer can tell exactly how much satisfaction she can derive from consumption of a certain goods.
The theory assumes a cardinal measure in units called utils, using an instrument called utilometer ,however some economics have suggested that utility can be measured in monetary units by the amount of money offered for a commodity.
On the other hand the ordinal utility approach which argues that a consumer can't measure satisfaction numerically or subjectively.
The ordinal utility is also commonly known as indifference curve theory because its analysis is based on on indifference curve.
Indifference curves are psychological levels of satisfaction hence are more hypothical then real.
differences between these two theory are The major:-
1. In ordinal utility theory , the consumer can't be measured numerically the level of satisfaction derived from consumption of a good but can instead arrange or rank the difference baskets of goods basing on the quantities contained in each and their satisfy power with assumption that goods are homogeneous .
The consumer assumed to have the ability to rank the different combinations in such way that he chooses the great satisfy power.
While cardinal utility is measured in monetary terms or in utils and it is measurable and quantitative where as ordinal is not measurable and is qualitative.
2. Ordinal utility factions are unique up to positive monotone transformations while cardinal utilities are also unique up to positive linear transformations.
3. Utility functions of both sorts assign a ranking to member of a choice set. For example suppose a cup of orange juice has utility of 120 utils , a cup of tea has a utility of 80 utils , and a cup of water has a utility of 40 utils when speaking of cardinal utility , it could be concluded that the cup of orange juice is better than the cup of tea by exactly the same amount by which the cup of tea is better than the cup of water. One is not entitled to conclude however , that the cup of tea is two third as good as the cup of juice , because this conclusion would be depend on not only on magnitudes of utility differences but also on the zero of utility.