In: Economics

Cardinal Utility Approach and Ordinal Utility Approach in Economics.

Define 'Cardinal Utility Approach' and 'Ordinal Utility Approach' in Economics?

Explain clearly how 'Ordinal Utility Approach' is superior to 'Cardinal Utility Approach' ?

Solutions

Expert Solution

Cardinal Vs Ordinal Utility Approaches -

Utility can be considered in two ways-

1. Objective
2. Subjective

The classical and neo-classical economists assumed it to be objective or, in other words, they thought that the utility is imbibed in the commodity. This resulted in what we call the Cardinal Utility Approach, where utility is considered to be measurable in specific units in numerical terms. The law of diminishing utility is based on this approach.

Suppose we consider, utility to be measurable, then the following problems arise:

1.    If, suppose, the utility of x commodity is 15 units and of y is 10 units, then as per measurable approach, we should get a utility of 25 units when both commodities are taken together. However, if we see the reality, then total utility can be less than or greater than the summation of their individual utilities and this will depend upon the nature and properties of the two commodities.

If the commodities are substitutes, like tea and coffee then the total utility of their joint use will be less than the summation of their individual utilities. If they have opposite attributes, then the total utility can be zero or negative also.

For example, if the utility of a cup of tea is 5 and of a cold drink is 10. Then the total utility of their joint use will be zero or even negative. If the two commodities are complementary, then the total utility from their joint use will be far greater than the summation of their individual utilities.

2.   If utility is considered to be objective, then, every person using a commodity should get the same utility. But in reality it is not so. Some people get a higher level of utility from a commodity but for some other person the utility may be quite low.

3.   If utility is objective and measurable, then it should not change according to time and place. However, in reality it is not so. Some goods provide a higher level of utility at a place, but by change of place or time the utility may increase or decrease.

4.   Suppose, utility is considered as cardinal and numerically measurable, then the question arises that what will be the unit of measurement. The classical and neo-classical economists had assumed it to be some imaginary unit i.e. Util, but this is also an imaginery unit and it has no realistic existence. Now, if money is considered to be a unit, the problem is that the marginal utility of money itself is not constant. Hence, it can not be the right unit of measuring utility. Even otherwise, money is a unit of measuring price and not utility.

Because of the above reasons the cardinal utility approach of utility measurement was considered improper and defective and a new concept was, therefore, warranted. The new concept was called the Ordinal Utility Approach and J.R. Hicks and R.G.D. Allen are credited for developing this approach.

According to this approach, utility is not objective, but it is subjective. It means that the utility is not imbibed in the commodity, but is dependent on the person using the commodity. We have seen earlier that utility is the want satisfying power of a commodity and satisfaction is a state of mind. Since a state of mind is not numerically measurable, utility can also not be numerically measured. As we can not measure our sorrow, happiness, pleasure, worries etc. we can not measure utilities.

Because of these things J.R. Hicks considered the cardinal utility approach to be flawed and defective for analysing the consumer behaviour and developed the ‘Indifference Curves' technique'.

The classical and neo-classical economists assumed it to be objective or, in other words, they thought that the utility is imbibed in the commodity. This resulted in what we call the Cardinal Utility Approach, where utility is considered to be measurable in specific units in numerical terms.

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