Cardinal and Ordinal Utility

•Utility : Want satisfying capacity of a commodity.

•Ability of a commodity to satisfy one or more needs of a consumer.

- Cardinal Utility

• Neo Classical economists like Alfred Marshall, Leon Walras and Carl Menger believed that
utility is cardinal or quantitative like other mathematical variables such as height, weight,
velocity, air pressure and temperature. They advocated that utility can be measured and
expressed in countable numbers.

• Utility of a commodity for a person equals the amount of money he/she is willing to pay for a
unit of the commodity. In other words, price one is prepared to pay for a unit of a commodity
equals the utility he expects to derive from the commodity.

• They developed a unit for measuring utility which is known as utils.

- Assumptions

 Rationality
 Cardinal utility
 Constant Marginal utility of money: The essential feature of a standard unit
of measurement is that it be constant. If the marginal utility of money
changes as income increases (or decreases) the measuring-rod for utility
becomes like an elastic ruler, inappropriate for measurement.

 Utility is additive: Cardinalists assumed not only that utility is cardinally

measurable but also that utility derived from various goods and services
consumed by a consumer can be added together to obtain the total utility

𝑼𝒏 = 𝑼𝟏(𝑿𝟏)+ 𝑼𝟐 (𝑿𝟐)+𝑼𝟑 (𝑿𝟑)+ …..+ 𝑼𝒏 (𝑿𝒏)

 Quantity of Total Utility
Muffins Consumed
0 0
1 6
2 11
3 14
4 15
5 15
6 13
Marginal Utility Average Utility
ΔTU/ΔQ TU/Q
- -
6 6
5 5.5
3 4.7
1 3.8
0 3
-2 2

 Diminishing marginal utility : The utility gained from successive units of a commodity
diminishes. as the quantity consumed of a commodity increases, the utility derived from
each successive unit decreases, consumption of all other commodities remaining the same.

In simple words, when a person consumes more and more units of a commodity per unit of
time e.g., ice cream, keeping the consumption of all other commodities constant, the utility
which he derives from the successive units of consumption goes on diminishing
 Consumer Equilibrium

Consider the simple model of a Units MU of MU of Price of

Consumed Ice- Money Ice-
single commodity x. cream (Re 1) Cream
Scoop (in utils) Scoop
The consumer can either buy x (in utils) (Rs.)

or retain his money income y.

Consumer’s equilibrium –
1 50 1 > 30
Marginal utility of x is equated 2 40 1 > 30
with its market price (Px) 3
4
30
20
1
1
=
<
30
30
5 10 1 < 30

i.e. MUx = Px
If the marginal utility of x is greater than its price, the
consumer can increase his wel­fare by purchasing more
units of x.

Similarly if the marginal utility of x is less than its

price the consumer can increase his total satisfaction
by cutting down the quantity of x and keeping more of
his income unspent.

Therefore, he attains the maximization of his utility

when
MUx = Px.
Equi-Marginal Utility Principle

In the real world, a consumer purchases more than one

commodity.
Let us assume that a consumer purchases two goods X and Y.
The condition for the equilibrium of the consumer is the
equality of the ratios of the marginal utilities of the individual
commodities to their prices.

MUx/Px = MUy/Py

If he buys more than two products, the equation would be

MUx/Px = MUy/Py =…………= MUn/Pn

 Ordinal Utility

Ordinal utility
 Economists like J.R. Hicks believed that satisfaction derived
from different commodities cannot be measured objectively.
 Utility is a psychological feeling and is not quantifiable.
 Ordinal utility implies that consumer is capable of
comparing different levels of satisfaction.
 The consumer ranks the choices in terms of preferences, i.e.
instead of expressing in terms of utils, they rank different
commodities.
 e.g. A consumer after eating an apple and an orange may
express the utility derived by ranking 1st and 2nd
Assumptions

 Rationality
 Ordinal utility
 Transitivity and consistency of choice : If a consumer prefers A to
B and B to C, then he should prefer A to C. Consistency means if
in one period he prefers A to B he cannot prefer B to A in another
period.
 Diminishing marginal rate of substitution : MRS means the rate at
which a consumer is willing to substitute one good(X) for another
good (Y), without change in the level of satisfaction
MRS x,y = ∆Y/∆X
Indifference Curve
 J.R Hicks and R.G.D Allen criticised the cardinal utility analysis
propounded the indifference curve analysis in 1939

Definition : indifference curve is the locus of points that show different

combinations of two commodities (X,Y) which give the consumer
same level of satisfaction.

• Indifference Schedule
Combinations X (Oranges) Y (Apples) Satisfaction
A 2 15 K
B 5 9 K
C 7 6 K
D 17 2 k
Indifference
Curve
 Properties

• Indifference curves slope

downwards from left to right.
• Indifference curves are convex
to the origin. (Reason –
Diminishing marginal rate of
substitution.)
• Indifference curves do not
intersect each other.
• Higher indifference curve shows
higher level of satisfaction.