9) Make a comparative analysis of Cardinal Utility Approach and Indifference
Curve Approach.
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In economics, cardinal and ordinal approaches to consumer behaviour determine the utility of a commodity or a service. In general, utility is a psychological incident that shows the favouring and satisfying strength of a service or product. It varies according to every individual.
What is Cardinal Utility?
The proposition that economic prosperity can be rightly perceived and provided with value is termed as a cardinal utility. Individuals can determine the use of certain products consumed. Cardinal utility prompts measuring of the satisfactory levels in utils.
It is necessary for economic well-being as it tries to set a value. Furthermore, allocative efficiency appears when the marginal cost becomes equal to marginal utility.
The supply and demand of a product decide its price. Moreover, a person’s desire for a product depends on these three factors:
Price of the item
Income of a person
The cost of other related items
Applications of Cardinal Utility
Welfare Economics
Under this structure production of goods and providing services are judged by the personal wealth of an individual. This means that it presents a way to comprehend the “greatest good to the greatest number of persons”. For example, by this act, a person’s utility decreases by 75 utils and increases two other persons’ each by 50 utils. However, the overall increase is 25 utils which is a positive offering.
Marginalism
In cardinal theory, a product’s marginal utility sign is alike for all the mathematical forms, but its magnitude is not same. This applies for second derivative of a differentiable utility as well.
Expected Utility Theory
This framework works for settlements that are to made under risks. Suppose there are a few lottery tickets that will provide outcomes. Here, it is possible to plot preferences in real numbers so that numerical representation can be done.
Intertemporal Utility
In various representations of utility, where people deduct the upcoming values of utility, cardinality comes into play. With the use of this, it is feasible to generate proper utility functions.
What is Ordinal Utility?
The function that represents utility of a product according to its preference, but does not provide any numerical figure, is known as an ordinal utility. In simpler words, this theory affirms that it is relevant to ask which item is better as compared to others instead of how good is that product. For example, a BMW car is favoured more than a Toyota car, but it cannot be determined by what percentage.
Apart from showing a mathematical function, a consumer’s preference can be demonstrated graphically through indifference curves. It becomes easy when there are two types of commodities x and y. Each indifference curve provides coordinates (x,y) when (x1, y1) and (x2, y2) lies on the same curve line and (x1, y1) ~ (x2, y2).
This is an example of an indifference curve map where the preference of goods are shown but not their quantity. Each of the curves represents a combination of two services or goods. The consumers are equally satisfied with the goods and services. The more distant a curve is from the origin, the higher its utility level.
Do you know: In 1934 John Hicks and Roy Allen produced the first paper which declared ordinal utility.
Here Is a Comparison Chart The Shows Ordinal vs Cardinal utility.
Basis for Comparison
Ordinal Utility
Cardinal Utility
Meaning
The utility where user satisfaction of a commodity is evaluated by preference but cannot be written in numbers.
The utility where user satisfaction is derived by a consumer from its consumption and can be expressed in numerical units.
Approach
Qualitative
Quantitative
Evaluation
Ranks
Utils
Examination
Indifference Curve Analysis
Marginal Utility Analysis
Promoted by
Modern economists
Traditional and neo-classical economists
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