Utility theory in economics

 In economics, utility theory can be broadly categorized into two main types: cardinal utility and ordinal utility. These concepts represent different approaches to measuring and representing the satisfaction or happiness (utility) individuals derive from consuming goods and services.

Cardinal Utility: Cardinal" utility is the idea of measuring economic value through imaginary units, known as "utils."

Quantifiable Satisfaction: Cardinal utility assumes that utility can be assigned specific numerical values, and the differences in utility between different levels of consumption can be measured and compared. In other words, it implies a cardinal (numerical) scale of utility.

Util and Utilitarianism: The unit of measurement for utility is often referred to as a "util." This concept is associated with utilitarianism, a moral and ethical theory that suggests actions are right if they promote the greatest happiness or well-being for the greatest number of people.

Summation of Utility: Cardinal utility allows for the summation of utility across different individuals to make interpersonal utility comparisons. This feature, however, has been criticized because individual preferences are subjective and not directly comparable.

Ordinal Utility:"Ordinal" utility refers to the concept of one good being more useful or desirable than another.

Ranking Preferences: Ordinal utility, on the other hand, focuses on the ranking or ordering of preferences. It suggests that while individuals can rank their preferences and indicate which option they prefer over another, the specific numerical values assigned to these preferences are not meaningful.

Indifference Curves: In ordinal utility theory, economists often use indifference curves to represent combinations of goods and services that provide the same level of satisfaction (utility) to an individual. These curves indicate preference rankings but do not quantify the magnitude of satisfaction.

Avoids Interpersonal Comparisons: Ordinal utility avoids the pitfalls associated with making interpersonal utility comparisons because it does not assume that the numerical values assigned to utility are comparable across individuals.

Most modern economists tend to adopt the ordinal utility approach due to its simplicity and avoidance of the challenges associated with measuring and comparing cardinal utility across different individuals. While ordinal utility focuses on the order of preferences, it still allows economists to analyze consumer choices, derive demand curves, and make predictions about consumer behavior without needing to assign specific numerical values to utility.

It's worth noting that both cardinal and ordinal utility are theoretical constructs, and the choice between them often depends on the specific modeling needs and assumptions of the analysis at hand.

 

	Cardinal Utility	Ordinal Utility
Meaning	Cardinal Utility is the utility where the satisfaction derived by consuming a product can be expressed numerically	where the Ordinal Utility is the satisfaction derived by consuming a product cannot be expressed numerically
Approach	Quantitative	Qualitative
Evaluation	Utils	Ranks
Examination	Marginal Utility Analysis	Indifference Curve Analysis
Promoted By	Traditional and Neo-Classical Economist, Like Alfred Marshall	Modern Economist Like J. R. Hicks, R. G. D Allen