Sunday, May 2, 2010

Cardinal vs ordinal utility analysis

Cardinal vs ordinal utility analysis
The concept of indifference curve was propounded in economics to replace the law of diminishing marginal utility.Marginal utility analysis is cardinal utility analysis and indifference curve analysis is ordinal utility analysis.These two concepts seen to be alternative.But,in reality,indifference curve has adopted some of the assumption of cardinal utility analysis.According to Edwin Marshal :The great 19th century economists like William Stanley jevons of England,Karl Menger of Austria,Leon Walras of France believed utility was measurable in cardinal sense.In contrast,most 20th century economists following the lead of E Slutsky,Vilfredo Pareto,Sir John Hicks assume that utility is measurable in an ordinal sense,Which means that a consumer can only rank various market baskets with regard to the satisfaction they give him and her."
The basic difference between marginal utility analysis and indifference curve analysis are as follows :
  1. Measurement of utility :According to cardinal analysis,utility can be measured quantitatively.For example,the total utility derived from a commodity can be expressed as 20,30,40 units.Marginal utility can also be measured in similar way.But according to indifference curve analysis utility cannot be measured quantitatively,since utility is a psychological phenomenon.
  2. Express the preference :According to cardinal analysis,utility can be measured quantitatively.So a consumer can express his preference.He not only can say that commodity X is preferable to Y,but he can also say by how much he prefers commodity X to commodity Y.But in ordinal utility,the consumer does not state quantity,but can say that the satisfaction derived from a combination of goods in high or low that from other combinations.
  3. Interest in combination of goods :In cardinal analysis,it is assumed that a consumer becomes interested in a good in a particular period of time.Hence,most of its theories are based on the analysis of one commodity.But in ordinal analysis,it is assumed that the consumer is interested in a combination of good.He may prefer one combination to other or both combinations may be equally preferable to him.He is said to be indifference between two combinations.The curve on which combinations of goods yielding same total shown is called indifference curve.
  4. Observe the preference :According to cardinal analysis,utility can be measured and at the same time the preference of the consumers can be observed.For example,if a man buys orange and does not buy apple,we can be say that he prefers orange to apple.According to ordinal analysis,utility cannot be measured,but it is possible to observed the preference of the consumer.For example,if a consumer spends all his money on combination A instead of combination B,we can say that he prefers combination A to B.Alternatively,we can say that he derived more satisfaction form combination A than from combination B.

1 comment:

  1. It iz same as book answer.......we need extra knowledge or answer coz if we write same ans in xm...teachers can't give us a gud mark by thinking its a book ans......