The consumption theory is based on the notion that consumer aims at maximizing his utility, and thus, all his actions and doings are directed towards the utility maximization. A person can only realize how much utility he or she derives from a commodity. Further, it has been realised with the passage of time that the cardinal measurement of utility is not possible, thus less realistic. Cardinal Approach follow the Law of Diminishing Marginal Utility while Ordinal Approach follow the Indi … fference Curve. Different temperature scales map its intensity in different ways. Utility is a Relative Phenomenon Since the concept of utility is subjective, it differs from person to person depending upon the personal needs and external circumstances. They renamed utility in imaginative ways such as subjective wealth, overall happiness, moral worth, psychic satisfaction, or ophélimité.
A different meaning of cardinality was used by economists who followed the formulation of Hicks-Allen. The total utility increases, but at a decreasing rate, up to quantity x, and then starts declining figure 2. He seeks to maximize satisfaction from the limited income which is at his disposal. There's a problem, however, with this concept, convenient though it may be: As a rule, consumers don't calculate the numerical utility value of their purchases. The satisfaction derived from various commodities cannot be measured objectively.
The most convenient measure is money. Moreover, they believed that the concept of cardinal utility is useful in analyzing consumer behavior. For example: Suppose a person prefers tea to coffee and coffee to milk. Consumer is rational he always maximises his utility-rationality have many implication in many other economic theory 3. In economics, cardinal utility is a theory of utility under which the utility roughly, satisfaction gained from a particular good or service can be measured and that the magnitude of the measurement is meaningful. However, modern economists rejected the cardinal utility approach and introduced the concept of ordinal utility for the analysis of consumer behavior.
Some utilitarians believed that since utility has diminishing marginal returns, it could be shaven off the top of an individual and given to another individual who would find the utility more useful. Because of this reason, aforementioned economists are known as ordinalists. Indifference curve analysis is basically an attempt to improve cardinal utility analysis principle of marginal utility. Conclusion These two above mentioned demand analysis approaches are not in competition with each other, but during the analysis of consumer behaviour, they represent two levels of sophistication. Using ordinal utility a customer can rank the products according to the level of satisfaction that was derived. Over the passage of time, it was realized that the absolute measure of utility is not possible, i. Why are such arbitrary and seemingly inexact measurements used in microeconomics? The two principal theories for the utility are cardinal utility and ordinal utility.
A consumer with two children who also want ice cream cones may assign a utility value of 100%, if price discounts are given for the purchase of additional ice cream cones. He has two options either to spend income to purchase good X or retain it in the form of an asset. Utility theory holds that consumers will evaluate an indeterminate number of used cars, calculate the value of their variables and then buy the car with the highest number derived from that formula. However this is not necessarily true. The numbers used for city street naming are cardinal numbers and carry no ordinal function or quality. Equilibrium of the Consumer : We begin with the simple model of a single commodity x.
Further information: In 1955 and Muriel Winet solved the issue of the representability of preferences by a cardinal utility function, and derived the set of axioms and primitive characteristics required for this utility index to work. According to ordinal utility, the goods and services that offer the customer a higher level of satisfaction will be assigned higher ranks and the opposite for goods and services that offer a lower level of satisfaction. So, money is a unit of measurement in cardinal approach. It is expressed as a quantity measured in hypothetical units which called utils. However, tobacco products give great amount of utility to a smoker. This law holds true for the theory of consumer behavior.
If a thirsty person is given water in a spoon, then every additional spoon will yield him more utility. The cardinal notion of number is like calling the number as a name. Further to this in cardinal utility it is assumed that consumers derive satisfaction through consumption of one good at a time. For instance, a consumer consumes coconut oil and mustard oil. The essential feature of a standard unit of measurement is that it be constant.
In order to derive a plausible conclusion, the consumer under consideration must be a rational human being. However, the cardinal utility concept has a prime importance in consumer behavior analysis. A rough numerical measure of consumer satisfaction is derived — what microeconomics calls cardinal utility, which refers to the cardinal numbers, starting with 1, 2, 3 and so on. He tries to maximize his total utility under the income constraint. Furthermore, the consumer is disinclined to buy the additional ice cream cones at a discounted price because by the time he or she gets home, they'll have melted away. However an indirect measure of utility is present in the price that is paid by the consumer for the specific commodity.