Cardinal & Ordinal utility

Ordinal utility: Distinguish between Cardinal and Ordinal utility

Ordinal utility: Ordinal utility is an approach invented by J. R. Hicks and R. G. D Allen in their well-known paper ‘A reconsideration of the theory of value.’ In 1939 Hicks reproduced the indifference curve theory of consumer’s demand in his book ‘value and capital’ modifying somewhat the version of the original paper.

According to ordinal utility approach, utility is a psychic entity and it cannot therefore be measured in quantitative cardinal terms. The ordinal utility simply implies that the consumer is capable of simply ‘Comparing the different level of satisfaction.’ In a word, ordinal utility being a psychic entity cannot be expressed in definite numbers but can be compared in accordance with scale of preference such as 1^st, 2^nd and 3rd.

Ordinal utility is expressed with the help of indifference curve analysis. In the above diagram, there are three indifference curves IC 1, IC 2, IC 3. Of them, IC 3 shows higher utilities than that of all. As, IC 3 gives the consumer much satisfaction so it takes first place in the consumer’s mind. Then IC 2 takes the second and IC 1 takes the third place in the scale of preference.

The differences between cardinal and ordinal utility is discussed below:

Cardinal utility	Ordinal utility
1. Cardinal utility assumes in the first place that utility is measurable and quantifiable.	1. Ordinal utility cannot be measurement and expressed in quantitative terms.
2.t is expressed in definite numbers such as 1, 2, 3 etc.	2. It is expressed in ordinal term such as 1st, 2nd, 3rd etc.
3. Cardinal utilities of two separate goods are independent of one another.	3. Ordinal utilities of two goods shown by indifference curve as dependent of each other.
4. Cardinal utility measures utility of one good only at a time.	4. It measures utilities of two goods at a time.
5. As there is only one good, there is no rate of substitution.	5. There is a marginal rate of substitution in indifference curve analysis.
6. Cardinal utility analysis does not consider utility as a quantifiable entity.	6. It considers utility as psychic entity.
7. Cardinal utilities of separate goods are additive.	7. Ordinal utilities of separate goods are not additive, as they are not expressed in definite numbers.
8. It assumes that marginal utility of money remains constant.	8. There is no assumption of constancy of marginal utility of money.
9. It ignores income effect and substitution effect.	9. It considers income effect and substitution effect.
10. It is unrealistic and unreliable.	10. It is more realistic and more reliable.