Cardinal and Ordinal

Approaches
CARDINAL UTILITY AND
ORDINAL UTILITY
 MEANING OF UTILITY:

Utility is the basis study of consumer

behaviour.

In economics the term utility refers to the

capacity of a commodity to satisfy human
wants.
 DEFNITION OF UTILITY:

According to BRIGG’S , “ utility is not

only the measurement of satisfaction
but also the measurement of intensity
of satisfaction’’.
MEASUREMENT OF UTILITY

Economists have offered their theories

Of consumers behaviour on the basis of the
measurement of utility. There are two major
approaches to measure the utility:

CARDINAL MEASUREMENT UTILITY.

ORDINAL MEASUREMENT UTILITY.

Accordingly we have:

CARDINAL UTILITY THERORY OF

CONSUMER BEHAVIOUR.

ORDINALY UTILITY THEROY OF

CONSUMER BEHAVIOUR.
CARDINAL UTILITY OF
CONSUMER BEHAVIOUR:

MEANING OF CARDINAL UTILITY:

Cardinal utility means the

satisfaction of a consumer can be
measured in terms of numbers.
 The cardinal utility theory of consumer
behaviour was given by
PROF.MARSHALLIAN to define consumer
equilibrium.

PROF.MARSHALLIAN defines CARDINAL

UTILITY as, “ consumer could measure the
satisfaction derived by the consumption
of any goods or services in terms of
numbers and units. That unit is known as
UTILS’’.
 Marshallian have been explained the
cardinal utility theory of consumer
behaviour by :

THE LAW OF DIMINISHING

MARGINAL UTILITY.

THE LAW OF EQUI-MARGINAL

UTILITY.
TOTAL UTILITY:
Total utility
means the amount of utility derived from
the consumption of all units of a
commodity which are at the disposal of the
consumer.

MARGINAL UTILITY:
Marginal
utility means the additional utility
resulting from the consumption of an unit
of a commodity.
LAW OF DIMINISHING
MARGINAL UTILITY:

According to MARSHALLIAN, “ The

additional benefit which a person derives
from a given increase of his stock of a thing
diminishes with every increase in the stock
that he already has”.
EXAMPLE FOR LAW OF DMU:

This law can be explained by the following

example:
Suppose a person start drinking juice.
First glass of juice has a great utility for him.
If he takes the second glass of juice, the
utility will be less than the first and so on.
The utility goes on diminishing with the
consumption of every next unit and it drops
down to zero. If the consumer is forced
further, the utility will become negative.
SCHEDULE OF LAW OF DMU:
UNITS TOTAL MARGINAL
UTILITY UTILITY
1st glass 10 10
2nd glass 18 8
3rd glass 24 6
4th glass 28 4
5th glass 30 2
6th glass 30 0
7th glass 28 -2
 LAW OF DIMINISHING
MARGINAL UTILITY CURVE:
Y The OY-axis represents the
F
marginal utility.
10

8 The OX-axis represents the

6 units.
UTILITY

4
2 The FF1 curve represents the
diminishing marginal utility.
0
X
1 2 3 4 5 6 7
-2
F1
UNITS
ASSUMPTIONS OF LAW OF
DMU:
o Tastes, preferences etc of the consumer
remains unchanged.

o Income of the consumer also remains

constant.

o Units of the goods are identical or

similar.

o The process of consumption is

EXCEPTIONS OF LAW OF
DMU:
o The law of DMU is not applicable to
money.

o It is not applicable to rare

collections like old stamps, old coins
etc.

o It is not applicable to the

consumption of liquor.
LAW OF EQUI-MARGINAL
UTILITY:
It is the desire of every consumer that he
wants to get maximum satisfaction from
his limited resources. He can solve this
problem if he spends his income in such a
way that the last rupee spent on each
item gives him the same amount of
satisfaction. It is called the law of equi
marginal utility.
 Law of equi-marginal utility is also
known as
the LAW OF SUBSTITUTION. Because it is
the only law by which the marginal
utilities have been equalized through the
law of substitution.
SCHEDULE OF LAW OF EQUI-
MARGINAL UTILITY:
UNIT OF MARGINAL MARGINAL
MONEY UTILITY OF UTILITY OF
ICE-CREAM CHOCOLATE
1 10 8
2 8 6
3 6 4
4 4 2
5 2 0
TOTAL 30 20
LAW OF EQUI-MARGINAL
UTILITY CURVE:
Y
I
10
C
8
A
6 E
MRGINAL
UTILITY

2
I1
F B C1
0 X
1 2 3 4 5

UNITS
The OX-axis represents the units.

The OY-axis represents the marginal

utility.

The I & I1 represents the marginal utility

curve of ice-cream.

The C & C1 represents the marginal

utility curve of chocolate.

Then AB=EF the both utility are equal.

According to law of equi-marginal utility,
a consumer will be at equilibrium when,

MUx/Px= MUy/Py
ASSUMPTION OF LAW OF
EQUI-MARGINAL UTILITY:

The income is limited in this law.

The utility will be independent in this

law.

The utility can be measurable

numerically in this law.
EXCEMPTIONS OF LAW OF
EQUI-MARGINAL UTILITY:
The utility is immeasurable so it is difficult
to behave according to law.

Sometimes due to ignorance's people don’t

obtain the maximum advantage of the law.

If the unit of expenditure is indivisible then

this law will not operate.
ORDINAL UTILITY THEORY
OF CONSUMER BEHAVIOUR:

MEANING OF ORDINAL UTILITY:

Ordinal utility refers to

satisfaction of a consumer can be
measure by ranking.
The ORDINAL UTILITY THEORY OF
CONSUMER BEHAVIOUR was given by
PROF.J.R.HICKS.

According to prof.J.R.HICKS “ORDINAL

UTILITY means giving rank to the utility
derived by the consumption of goods and
services”.
“SCALE OF
PREFERENES”:ORDINAL
UTILITY
 Ordinal measurement implies comparison and
ranking without quantification of the
magnitude.
 Level of satisfaction is a function of increasing
the stock of goods.
 The conceptual arrangement of combination
of goods and services set in order of level of
significance is called SCALE OF PREFRENCES.
EXAMPLE OF SCALE OF
PREFRENCES.
Combination b/w Level of Ranking order of
apples and satisfaction preference
bananas derived
(a) 12 Apples + 12 Highest 1st
Bananas
(b)10 Apples + 19 Less than (a) 2nd
Bananas
(c)5 Apples + 5 Less than (b) 3rd
Bananas
CHARACTERISTICS OF SCALE
OF PREFRENCES
 It is drawn by a consumer in his mind.
 It is based on the subjective valuation of goods
made by the consumer.
 It is independent of the prices of goods and
consumer’s income.
 Its differ from person to person.
 It represent ordinal comparison of the level of
satisfaction derived by the consumer from
different combination of goods.
DEFINATION OF
INDIFFERNECE SCHEDULE

An indifference schedule is a list of alternative

combinations in the stocks of two goods which
yield equal satisfaction to the consumer. An
indifference schedule represents only equal
satisfaction combinations at a particular
order of preference while a scale of preference
represents all combinations yielding different
as well as equal levels of satisfaction.
EXAMPLE OF INDIFFERENT
SCHEDULE
Combination Apples Bananas Marginal
giving equal (X) (Y) rate of
satisfaction substitution
(ΔY)/(ΔX)

(a) 1 12 ----
(b) 2 8 -4/1 = -4
(c) 3 5 -3/1 = -3
(d) 4 3 -2/1 = -2
DEFINATION INDIFFERENCE
CURVE

An indifference curve is the locus of

points representing all the different
combinations of two goods (say X and Y)
which yield equal utility and satisfaction
to the consumer. It is a geometrical
device representing all such
combinations of two goods yielding
equal satisfaction at a particular level.
EXAMPLE OF INDIFFERENCE
CURVE
INDIFFERENCE MAP

An indifference map is a set of

indifferent curves. An indifferences map
represents the scale of the preferences of
a consumer regarding various
combination of the given two goods. In
the example given in the next slide
shows IC4 curve has highest satisfaction
and IC1 curve has the lowest
satisfaction.
EXAMPLE OF INDIFFERENCE
MAP
ASSUMPTIONS
 A consumer is interested in buying two products
in combination.
 He is able to rank his preferences and give a
complete ordering of the scale of preferences.
 Non-satiation, i.e., the consumer always prefers
more quantities of goods to lesser quantity.
 He is rational and his choices are transitive.
 There is ordinal measurement of utility. so the
height of the indifference curve indicates the level
of satisfaction without quantification.
PROPERTIES OF
INDIFFERENCE CURVE

 Indifference curve slope downwards from left

to right , i.e., they are negatively sloped.
 The are convex to the origin.
 They cannot intersect each other.
SIMILARITIES OF CARDINAL
UTILITY AND ORDINAL
UTILITY :
Both the analysis are based on the
assumption that the consumer is
rational and he is interested to
maximize his total utility.
 Both the approaches follow the
proportionality rule. In one it is between
price and marginal utility while in the
other it is between price and marginal
rate of substitution.

In Marshallian utility approach the

equilibrium condition for a consumer is :
MUx/Px=MUy/Py. In J.K.Hicks utility
approach the equilibrium condition for a
consumer is: MRSxy=Px/Py.