Microeconomcis- difference between cardinal and ordinal utility

Cardinal vs Ordinal Utility  
Utility refers to the satisfaction that a consumer obtains from the purchase and use of commodities and services. According to economics there are two theories that are able to measure the satisfaction of individuals. These are the cardinal utility theory and the ordinal utility theory. There are a number of differences between the two in the methodologies that they use to measure consumption satisfaction. The article that follows offers a clear explanation on each type of theory and highlights the main differences between cardinal utility and ordinal utility.
Cardinal Utility
Cardinal utility states that the satisfaction the consumer derives by consuming goods and services can be measured with numbers. Cardinal utility is measured in terms of utils (the units on a scale of utility or satisfaction). According to cardinal utility the goods and services that are able to derive a higher level of satisfaction to the customer will be assigned higher utils and goods that result in a lower level of satisfaction will be assigned lower utils. Cardinal utility is a quantitative method that is used to measure consumption satisfaction.
Ordinal Utility
Ordinal utility states that the satisfaction the consumer derives from the consumption of goods and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system in which a ranking is provided to the satisfaction that is derived from consumption. According to ordinal utility, the goods and services that offer the customer a higher level of satisfaction will be assigned higher ranks and the opposite for goods and services that offer a lower level of satisfaction. The goods that offer the highest level of satisfaction in consumption will be provided the highest rank. Ordinal utility is a qualitative method that is used to measure consumption satisfaction.
What is the difference between Cardinal and Ordinal Utility?
Cardinal and ordinal utility are theories that are used to explain the levels of satisfaction that a consumer derives from the consumption of goods and services. There are a number of differences between the methods in which either measure consumption satisfaction. While cardinal utility is a quantitative measure, ordinal utility is a qualitative measure. Using Cardinal utility a customer can assign a number to a product that when consumed was able to satisfy their needs. Using ordinal utility a customer can rank the products according to the level of satisfaction that was derived. Further to this in cardinal utility it is assumed that consumers derive satisfaction through consumption of one good at a time. However, in ordinal utility it is assumed that a consumer may derive satisfaction from the consumption of a combination of goods and services, which will then be ranked according to preference.
Summary:
Cardinal vs Ordinal Utility
• Utility refers to the satisfaction that a consumer obtains from the purchase and use of commodities and services. According to economics there are two theories that are able to measure the satisfaction of individuals. These are the cardinal utility theory and the ordinal utility theory.
• Cardinal utility states that the satisfaction that the consumer derives by consuming goods and services can be measured with numbers.
• Ordinal utility states that the satisfaction that the consumer derives from the consumption of goods and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system in which a ranking is provided to the satisfaction that is derived from consumption.
• While cardinal utility is a quantitative measure, ordinal utility is a qualitative measure.
• In cardinal utility, it is assumed that consumers derive satisfaction through consumption of one good at a time. However, in ordinal utility it is assumed that a consumer may derive satisfaction from the consumption of a combination of goods and services, which will then be ranked according to preference.


Comments

Post a Comment

Popular posts from this blog

Work certified and uncertified

Meaning of Work Certified  When contractor takes the contract to complete any construction work, it may complete in 4 or 5 years. but contractor has to pay different expenses for material, labor and others. So, it is very necessary to pay him some money of contract. This money is given on the basis of work done. So, any part of construction which is completed by contractor will be work certified if it is certified by an authority. Authority may be independent engineer or architect who can estimated the work. He will issue the certificate of work done after certifying the work of construction. On this work certified, contractor has right to get money of contract. Meaning of Work Uncertified Work uncertified means work done but not certified by authority. So, contractee will cut some money on the basis of work uncertified and will keep in his pocket. This will be retention money. Accounting Treatment of Work Certified and Work Uncertified  (I) Work  certified...
Read more

factors influencing choice of advertising agency

The Advertiser looks for an advertising agency whose services and expertise meets his requirements. Following factors should be considered while selecting an advertising agency:- Services offered by Ad-agency  - There are different agencies provides different services, some provides all the services, some provide selected services, some provides only media services. It depends on the requirement of advertiser whether he need a fulls service agency, creative boutique, media buying service agency, or a  sweet shop . Experience of Agency  - An experienced agency performs better then a new agency  because it is familiar with different components of marketing environment like- competitors' policies, taste of consumer, income of consumer, consumer responses, fashions and trends, reputation of different media etc. Location  - A major factor to be considered while selecting ad-agency is location of office of agency. A considerable amou...
Read more

Environment of International Marketing

Image
Apple is so successful because of their effective marketing efforts. They are good in identifying relevant environmental factors and trends which helps in taking advantage of opportunities and minimising threats.  New technological developments, global economic conditions, worldwide population changes, increased competition, legislative requirements, and political events are some of the factors affecting current and future marketing activities of the organisations around the world. Combination of such factors makes the International Marketing Environment. The long term performance of any organisation depends on its ability to identify and respond effectively to the key changes in its marketing environment.  Meaning of International Marketing Environment  International Marketing Environment is the combination of various factors external to an organisation that can affect the international marketing decisions of the organisation in international market. These fac...
Read more