What is Ordinal Utility Approach?

What is Utility Analysis?

Consumers are the ones who make the majority of consumption decisions. A consumer is someone who buys goods and services to fulfil demands. He makes choices about the kinds of items to be bought to fulfil his desires. The primary goal is to maximise satisfaction from the goods and services he purchases with his income. To achieve the highest level of satisfaction, a consumer must follow certain rules or principles since resources are limited in nature in comparison to limitless demands. The two basic approaches for studying customer behaviour are the Cardinal Utility approach and Ordinal Utility Approach....

What is Cardinal Utility Approach?

People consume different goods and services to maximise their level of satisfaction. To achieve this, it is required to ascertain the level of satisfaction attained from a certain commodity. The Cardinal Utility Approach employs the concept of “Utility” to determine the level of satisfaction....

What is Utility?

The characteristic of a good or service that allows it to fulfil the needs of consumers is comprehended as its “utility.” It is the fulfilment—actual or anticipated—that results from the consumption of a good or service. Utility is a relative concept, this means that it differs from individual to individual, from location to location, and from period to period. A utility is its ability to satisfy a need....

How to measure Utility?

According to classical economics, utility can be measured similarly to how one would measure one’s height or weight. According to economists, the utility can be quantified in cardinal terms. It is possible to quantify the utility that an individual obtains through the consumption of commodities and services. However, there was no standardised method of calculating utility; so the economists came up with a hypothetical unit of measurement called Util....

Basic Limitation of Utility Analysis

The fundamental problem in utility analysis is that it makes the incorrect assumption that utility can only be stated in cardinal numbers. it implies that utils like 1, 2, and 3 can never accurately represent usefulness. When two things are consumed concurrently, satisfaction can be compared at best. It is challenging to assess in figures. Due to this drawback, utility analysis is shown to have minimal application in describing consumer equilibrium....

What is Ordinal Utility Approach?

This approach states that utility can not be expressed in cardinal numbers like 1,2,3, and 4, rather it can only be ranked as high or low. The concept of cardinal utility was discarded by modern economists. According to them, utility is a psychological experience that cannot be quantified in absolute terms. They believe that consumers can order different combinations of goods and services to their preferences....