|Learning Objective |
To explain the similarities and differences between cardinal and ordinal utility analysis (cardinal utility versus ordinal utility)
Ordinal utility analysis is considered the improved form of cardinal utility analysis and is also considered a superior method to study consumer’s behavior. Indifference curve analysis is more objective, more scientific, and more applicable because of its fewer and comparatively realistic assumptions than the assumptions of cardinal utility analysis. Both the methods of analysis are somehow different but the final conclusion is similar. So, there are certain similarities and certain fundamental differences in the comparison of techniques of both methods.
Similarities between Cardinal Utility and Ordinal Utility Analysis
The following table shows the major similarities between the two approaches of utility analysis.
|Similar Assumptions||Most of the assumptions of both approaches are similar. For instance, both of the methods assume consumers are rational. It means both approaches assume that a consumer is rational in the sense that he or she maximizes utility subject to his or her limited income. Symbolically, Maximize U= f (X, Y) Subject to M= PX. X+PY.Y Where U= Utility or satisfaction; and M= Money income or budget constraint This objective of the consumer is common in both cardinal and ordinal approach to analyze the utility. Similarly, other assumptions like limited income, transitivity in choice, perfect knowledge, and utility maximization are also common assumptions.|
|Identical Equilibrium Conditions||Both of the methods use identical equilibrium conditions. The necessary condition for consumer’s equilibrium under the cardinal approach is; MUX/MUY=PX/PY; and the first-order condition for consumer’s equilibrium according to ordinal utility analysis is; MRX X, Y = PX/PY As we know that MRX X, Y = MUX/MUY, so the first-order condition and necessary condition under ordinal and cardinal utility analysis are identical.|
|Diminishing Marginal Utility and Marginal Rate of Substitution||The next similarity between cardinal and ordinal utility analysis is the consideration of the law of diminishing marginal utility and the principle of diminishing marginal rate of substitution respectively. The law of diminishing marginal rate of substitution of ordinal utility analysis is the same as the law of diminishing marginal utility.|
|Use of Introspective Method||Both cardinal and ordinal utility analyses use a psychological or introspective method to evaluate satisfaction derived by the consumers. The law of diminishing utility and the indifference curve both are based on the introspective method of analysis.|
|Similar Conclusion||The cardinal utility analysis and Hicksian indifference curve analysis both reach the same conclusion about consumer behavior. Regarding the conclusion of consumers’ behavior analysis, there is nothing new in indifference curve analysis.|
Differences between Cardinal and Ordinal Approach
The major differences between the two approaches of utility analyses are presented in the following table.
|Cardinal Utility||Ordinal Utility|
|It is the outcome of the work of Neoclassical economists like Jevons, Menger, Walras, and Marshall starting with the marginal revolution in economics in the 1870s.||It is the outcome of the work of Hicks, and Allen in the 1930s.|
|The utility can be measured cardinally in terms of numbers||The utility can be compared or ranked whether it is higher or lower.|
|Money is used as a measuring rod and the marginal utility of money remains constant.||An indifference curve is a tool to measure consumer’s utility and it does not assume the marginal utility of money remains constant.|
|The utility is considered independent||It does not consider such an assumption and is based on transitivity and consistency assumptions|
|There is the law of diminishing marginal utility||There is a law of diminishing the marginal rate of substitution|
|There is no classification of goods||There is a classification of goods into superior, normal, inferior, and Giffen goods.|
|There is no analysis of income effect, price effect, and substitution effect||There is an analysis of income effect, price effect, and substitution effect|
|The derivation of the demand curve is based on many unrealistic assumptions||The demand curve, as well as the Engel curve, is possible under the various realistic assumptions|
|It is a traditional theory guided by so many unrealistic assumptions.||It is a relatively modern theory and guided by a few realistic assumptions.|
References and Suggested Readings
Acharya, K.R. (2018). Microeconomics. Kathmandu: Asmita Books Publishers & Distributors (P) LTD.
Ahuja, H.L. (2017). Advance Economic Theory. New Delhi: S. Chand & Company.
Dwivedi, D. N. (2018). Microeconomics Theory and Application. New Delhi: Vikas Publishing House PVT LTD
Kanel, N.R. and et. al. (2019). Microeconomics for Business. Kathmandu: Buddha Publications.