There are two basic approaches to the problem of comparison of utilities and hence to determine consumer’s equilibrium namely cardinal approach and ordinal approach in economic sense, consumer behavior theory explains the relationship between the changes in price and consumer demand. Although utility cannot be measured but in cardinal approach of consumer behavior, the term which is used as a unit of utility is known as util and arithmetic numbers (1, 2, 3, ) are used for example x ate an apple and got 10 util of utility. Assumptions: rational behavior of the consumer utility is ordinal diminishing marginal rate of substitution consistency in choice transitivity in choice making goods consumed are substitutable axioms of rational choice. The ordinal utility theory or the indifference curve analysis is based on four main assumptions (i) rational behavior of the consumer: it is assumed that individuals are rational in making decisions from their expenditures on consumer goods. In place of cardinal number system of one, two, three, etc, which is supposed to measure the amount of utility derived by the consumer, the indifference curves have the ordinal number system of first, second, third, etc, to indicate the order of consumer’s preferences.
Lancaster's characteristics approach to consumer demand illustrates this point comparison between ordinal and cardinal utility functions [ edit ] the following table compares the two types of utility functions common in economics. Cardinal utility theory approaches consumer demand from the standpoint of consumer utility, wherein demand is dependent upon factors of utility, price, income, substitutes and complementary goods. Neoclassical approaches among statisticians and to the applications for price indexes in economic insisted that observations of consumer behavior could only reveal preference rankings (ordinal (cardinal, weak ordinal, and strong ordinal) responded to shifts in utility functions (see table 1). Ordinal theory is also known as neo-classical theory of consumer equilibrium, hicksian theory of consumer behavior, indifference curve theory, optimal choice theory this approach also explains the consumer's equilibrium who is confronted with the multiplicity of objectives and scarcity of money income.
The indifference approach has definite advantages over the traditional utility approach in analysing consumer behaviour first, many students (and economists) are not im acceptable assumptions than the utility approach ^cardinal and ordinal utility consumer behaviour: the indifference approach the. 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. Batley, r (2007) on ordinal utility, cardinal utility, and random utility theory and decision, online issn 1573-7187 derivedやfromやrumややinやparticularやitやisやfoundやthatやmeasurementsやofやconsumerや behaviour,やunderlyingやprinciplesやや.
Marginal utility approach involves cardinal measurement of utility, ie, you assign exact values or you measure utility in exact units, while the indifference curve approach is an ordinal approach, ie, you rank possibilities or outcomes in an order of preferences, without assigning. Distinguish between the cardinal utility approach and ordinal utility approach are given below: cardinal utility refers to the satisfaction that can be measured number whereas ordinal utility refers to the satisfaction that can not measure by number. In this approach status is intrinsically ordinal (see for instance robson, 1992, cole et al, 1992, bagwell and bernheim, 1996, corneo and jeanne, 1998, hopkins and kornienko, 2004) the contributors to this stream of literature have rarely explained their choice to follow one approach or the other.
Economics : rational consumer choice micro econ - walentik yeah an attempt to explain consumer behavior by trying to measure utility or satisfaction a consumer received from a particular product law of diminishing marginal utility additional units of a commodity are worth less and less to a consumer in money terms ordinal approach. Difference between cardinal and ordinal utility the basic concept in this approach is utility which refers to satisfy power that a good or service consumed possesses in this approach, it is assumed that a consumer assigns a cardinal major which can be counted. Cardinal approach to consumer equilibrium definition: the cardinal approach to consumer equilibrium posits that the consumer reaches his equilibrium when he derives the maximum satisfaction for given resources (money) and other conditions a consumer is said to be highly satisfied when he allocates his expenditure in such a way that the last unit of money spent on each commodity yields the. Theory of consumer behavior on the basis of measurement of utility cardinal utility theory of consumer behavior and ordinal utility theory of consumer behavior seeks to explain the decision making behaviour of the consumer in demanding a particular commodity.
In economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale the ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to ask how much better it is or how good it is. In sum, the cardinal utility numbers generated by neoclassical utility functions provide more information than do their ordinal counterparts in fact, for any given set of bundles they contain all. Neoclassical utility functions are an invalid means of analyzing consumer behavior for three reasons: first, and most important, because such functions, and their attendant rankings, are cardinal, not ordinal in nature second, because, with respect to the set of bundles relevant to actual human. Cardinal utility analysis the consumer cannot satisfy all his wants we will write a custom essay sample on cardinal & ordinal approach in economics specifically for you for only $1390/page we now examine the tools which are used in the analysis of consumer behavior concept of utility.
Online consumer’s behaviour cardinal utility analysis help: if you are stuck with an consumer’s behaviour cardinal utility analysis homework problem and need help, we have excellent tutors who can provide you with homework help. Solution: the limitations of cardinal approach to consumer behaviour: 1)the assumption of cardinal utility is extremely doubtfulin the sense that the satisfaction derived from the consumption of various goods cannot be measured objectively and the attempts by walras to use subjective units (utils) for the measurement of utility does not provide any solution 2)the assumption.