Difference Between Cardinal and Ordinal Utility

1176 WordsAug 17, 20115 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…show more content…
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. It is temping when dealing with cardinal utility to aggregate utilities across persons . the argument against this is that interpersonal comparisons utility are meaningless because there is no good way to interpret how different people value consumption bundles. But when ordinal utility are used difference in utils are

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