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Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach : Cakart team members provides here Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes and other Karnataka Class 12 Commerce Economics Concept related notes in pdf format. We provides you direct link for downloading Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes in pdf format. Download Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes and read well.

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach : Cardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption of good or service can be measured numerically.Ordinal utility states that the satisfaction which a consumer derives from the consumption of product or service cannot be measured numerically.

Download here Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes In PDF Format

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach : The measurement of utility has always been a controversial issue. Neo-classical economists, such as Alfred Marshall, Leon Walrus, and Carl Meneger believed that utility is cardinal or quantitative like other mathematical variables, such as height, weight, velocity, air pressure, and temperature.

Therefore, these economists developed cardinal utility concept to measure the utility derived from a good. They developed a unit of measuring utility, which is known as utils. For example, according to the cardinal utility concept, an individual gains 20 utils from ice-cream and 10 utils from coffee.

However, modern economists, such as J.R. Hicks, gave the concept of ordinal utility of measuring utility. According to this concept, utility cannot be measured numerically, it can only be ranked as 1, 2, 3, and so on. For instance, an individual prefers ice-cream than coffee, which implies that utility of ice-cream is given rank 1 and coffee as rank 2.

Let us discuss these two concepts in detail in the next sections.

1. Cardinal Utility Concept:

The neo-classical economists propounded the theory of consumption (consumer behavior theory) on the assumption that utility is cardinal. For measuring utility, a term ‘util’ is coined which means units of utility.

Following are the assumptions of the cardinal utility concept that were followed by economists while measuring utility:

a. One util equals one unit of money

b. Utility of money remains constant

However, over a passage of time, it has been felt by economists that the exact or absolute measurement of utility is not possible. There are a number of difficulties involved in the measurement of utility. This is because of the fact that the utility derived by a consumer from a good depends on various factors, such as changes in consumer’s moods, tastes, and preferences.

These factors are not possible to determine and measure. Therefore, no such technique has been devised by economists to measure utility. Utility; thus, is not measureable in cardinal terms. However, the cardinal utility concept has a prime importance in consumer behavior analysis.

2. Ordinal Utility Concept:

Cardinal utility approach is based on the fact that the exact or absolute measurement of utility is not possible. However, modern economists rejected the cardinal utility approach and introduced the concept of ordinal utility for the analysis of consumer behavior.

According to them, it may not be possible to measure exact utility, but it can be expressed in terms of less or more useful good. For instance, a consumer consumes coconut oil and mustard oil. In such a case, the consumer cannot say that coconut oil gives 10 utils and mustard oil gives 20 utils.

Instead he/she can say that mustard oil gives more utility to him/her than coconut oil. In such a case, mustard oil would be given rank 1 and coconut oil would be given rank 2 by the consumer. This assumption lays the foundation for the ordinal theory of consumer behavior.

According to neo-classical economists, cardinal measurement of utility is possible in practical situations. Moreover, they believed that the concept of cardinal utility is useful in analyzing consumer behavior. However, modern economists believed that utility is related to psychological aspect of consumers; therefore, it cannot be measured in quantitative terms.

In addition, they advocated that the ordinal utility concept plays a significant role in consumer behavior analysis. Modern economists also believed that the concept of ordinal utility meets the theoretical requirements of consumer behavior analysis even when there is no cardinal measure of utility is available.

Let us discuss the analysis of consumer behavior based on the two concepts, namely, cardinal utility concept and ordinal utility concept.

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes

Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach : The utility is a psychological phenomenon; that implies the satisfying power of a good or service. It differs from person to person, as it depends on a person’s mental attitude. The measurability of utility is always a matter of contention. The two principal theories for the utility are cardinal utility and ordinal utility. Many traditional economists hold the view that utility is measured quantitatively, like length, height, weight, temperature, etc. This concept is known as cardinal utility concept. On the other hand, ordinal utility concept expresses the utility of a commodity in terms of ‘less than’ or ‘more than’. Take a read of the article to know the important differences between cardinal and ordinal utility.

Content: Cardinal Utility Vs Ordinal Utility

Comparison Chart

BASIS FOR COMPARISONCARDINAL UTILITYORDINAL UTILITY
MeaningCardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption of good or service can be expressed numerically.Ordinal utility states that the satifaction which a consumer derives from the consumption of good or service cannot be expressed numerical units.
ApproachQuantitativeQualitative
RealisticLessMore
MeasurementUtilsRanks
AnalysisMarginal Utility AnalysisIndifference Curve Analysis
Promoted byClassical and Neo-classical EconomistsModern Economists

Definition of Cardinal Utility

The notion of Cardinal utility was formulated by Neo-classical economists, who hold that utility is measurable and can be expressed quantitatively or cardinally, i.e. 1, 2, 3, and so on. The traditional economists developed the theory of consumption based on cardinal measurement of utility, for which they coined the term ‘Util‘ expands to Units of utility. It is assumed that one util is equal to one unit of money, and there is the constant utility of money.

Further, it has been realised with the passage of time that the cardinal measurement of utility is not possible, thus less realistic. There are many difficulties in measuring utility numerically, as the utility derived by the consumer from a good or service depends on a number of factors such as mood, interest, taste, preferences and much more.

Definition of Ordinal Utility

Ordinal Utility is propounded by the modern economists, J.R. Hicks, and R.G.D. Allen, which states that it is not possible for consumers to express the satisfaction derived from a commodity in absolute or numerical terms. Modern Economists hold that utility being a psychological phenomenon, cannot be measured quantitatively, theoretically and conceptually. However, a person can introspectively express whether a good or service provides more, less or equal satisfaction when compared to one another.

In this way, the measurement of utility is ordinal, i.e. qualitative, based on the ranking of preferences for commodities. For example: Suppose a person prefers tea to coffee and coffee to milk. Hence, he or she can tell subjectively, his/her preferences, i.e. tea > coffee > milk.

Key Differences Between Cardinal and Ordinal Utility

The following points are noteworthy so far as the difference between cardinal and ordinal utility is concerned:

  1. Cardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption of good or service can be measured numerically. Ordinal utility states that the satisfaction which a consumer derives from the consumption of product or service cannot be measured numerically.
  2. Cardinal utility measures the utility objectively, whereas there is a subjective measurement of ordinal utility.
  3. Cardinal utility is less realistic, as quantitative measurement of utility is not possible. On the other end, the ordinal utility is more realistic as it relies on qualitative measurement.
  4. Cardinal utility, is based on marginal utility analysis. As against this, the concept of ordinal utility is based on indifference curve analysis.
  5. The cardinal utility is measured in terms of utils, i.e. units of utility. On the contrary, the ordinal utility is measured in terms of ranking of preferences of a commodity when compared to each other.
  6. Cardinal utility approach propounded by Alfred Marshall and his followers. Conversely, ordinal utility approach pioneered by Hicks and Allen.

Conclusion

These two above mentioned demand analysis approaches are not in competition with each other, but during the analysis of consumer behavior, they represent two levels of sophistication. Both cardinal and ordinal utility are vital to assess and analyse consumer demand for a good or service, irrespective of the purpose.

 Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes

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