CARDINAL UTILITY AND

ORDINAL UTILITY

MEANING OF UTILITY:
Utility is the basis study of
consumer behaviour.
In economics the term utility
refers to the capacity of a commodity
to satisfy human wants.

DEFNITION OF UTILITY:
According to BRIGGS ,
utility is not only the
measurement of satisfaction but
also the measurement of
intensity of satisfaction.

MEASUREMENT OF UTILIT
Economists have offered their
theories
Of consumers behaviour on the
basis of the measurement of utility.
There are two major approaches to
measure the utility:
CARDINAL MEASUREMENT
UTILITY.

Accordingly we have:

CARDINAL UTILITY THEROR

CONSUMER BEHAVIOUR.
ORDINALY UTILITY THEROY
CONSUMER BEHAVIOUR.

CARDINAL UTILITY OF
CONSUMER BEHAVIOUR:

MEANING OF CARDINAL UTILIT

Cardinal utility means the
satisfaction of a consumer
can be measured in terms of
numbers.

The cardinal utility theory of

consumer behaviour was given by
PROF.MARSHALLIAN to define
consumer equilibrium.
PROF.MARSHALLIAN defines
CARDINAL UTILITY as, consumer
could measure the satisfaction
derived by the consumption of any
goods or services in terms of
numbers and units. That unit is
known as UTILS.

Marshallian have been explained

the cardinal utility theory of
consumer behaviour by :
THE LAW OF
DIMINISHING MARGINAL UTILITY.
THE LAW OF EQUIMARGINAL UTILITY.

TOTAL UTILITY:
Total utility means the amount of
utility derived from the
consumption of all units of a
commodity which are at the
disposal of the consumer.

MARGINAL UTILITY:
Marginal utility means the
additional utility resulting from the

LAW OF DIMINISHING
MARGINAL UTILITY:
According to MARSHALLIAN, The
additional benefit which a person
derives from a given increase of his
stock of a thing diminishes with
every increase in the stock that he
already has.

EXAMPLE FOR LAW OF DM

This law can be explained by the
following example:
Suppose a person start drinking
juice. First glass of juice has a great
utility for him. If he takes the second
glass of juice, the utility will be less
than the first and so on. The utility
goes on diminishing with the
consumption of every next unit and
it drops down to zero. If the

SCHEDULE OF LAW OF DM
UNITS
1st glass
2nd glass
3rd glass
4th glass
5th glass
6th glass
7th glass

TOTAL
UTILITY
10
18
24
28
30
30
28

MARGINAL
UTILITY
10
8
6
4
2
0
-2

LAW OF DIMINISHING
MARGINAL UTILITY
The OY-axis represents
CURVE:
the marginal utility.
Y

UTILITY

10

The OX-axis represents

the units.

8
6
4
2

The FF1 curve represents

the diminishing marginal
utility.

0
-2

UNITS

7
F1

ASSUMPTIONS OF LAW
OF DMU:
o

Tastes, preferences etc of the

consumer remains unchanged.

Income of the consumer also

remains constant.

Units of the goods are identical

or similar.

The process of consumption is

EXCEPTIONS OF LAW OF
DMU:
o

The law of DMU is not

applicable to money.

It is not applicable to rare

collections like old stamps, old
coins etc.

It is not applicable to the

consumption of liquor.

LAW OF EQUI-MARGINAL
UTILITY:
It is the desire of every consumer
that he wants to get maximum
satisfaction from his limited
resources. He can solve this
problem if he spends his income
in such a way that the last rupee
spent on each item gives him the
same amount of satisfaction. It is
called the law of equi marginal
utility.

Law of equi-marginal utility

is also known as
the LAW OF SUBSTITUTION.
Because it is the only law by which
the marginal utilities have been
equalized through the law of
substitution.

SCHEDULE OF LAW OF
EQUI-MARGINAL UTILITY:
UNIT OF
MONEY

MARGINAL
UTILITY OF
ICE-CREAM

1
2
3
4
5

10
8
6
4
2

MARGINAL
UTILITY OF
CHOCOLAT
E
8
6
4
2
0

LAW OF EQUI-MARGINAL
UTILITY CURVE:
Y

10

I
C

MRGINAL
UTILITY

6
4
2

0
1

UNIT
S

C1
3

I1
5

The OX-axis represents the units.

The OY-axis represents the
marginal utility.
The I & I1 represents the
marginal utility curve of icecream.
The C & C1 represents the
marginal utility curve of
chocolate.

According to law of equi-marginal

utility, a consumer will be at
equilibrium when,

MUx/Px=
MUy/Py

ASSUMPTION OF LAW OF
EQUI-MARGINAL UTILITY:
The income is limited in this
law.
The utility will be independent
in this law.
The utility can be measurable
numerically in this law.

EXCEMPTIONS OF LAW
OF EQUI-MARGINAL
UTILITY:

The utility is immeasurable so it is

difficult to behave according to law.
Sometimes due to ignorance's
people dont obtain the maximum
advantage of the law.
If the unit of expenditure is indivisible
then this law will not operate.

ORDINAL UTILITY
THEORY OF CONSUMER
BEHAVIOUR:
MEANING OF ORDINAL UTILITY:
Ordinal utility
refers to satisfaction of a
consumer can be measure by
ranking.

The ORDINAL UTILITY THEORY OF

CONSUMER BEHAVIOUR was given by
PROF.J.R.HICKS.

According to prof.J.R.HICKS
ORDINAL UTILITY means giving
rank to the utility derived by the
consumption of goods and services.

SCALE OF
PREFERENES:ORDINAL
UTILITY
Ordinal measurement implies

comparison and ranking without

quantification of the magnitude.
Level of satisfaction is a function of
increasing the stock of goods.
The conceptual arrangement of
combination of goods and services set in
order of level of significance is called
SCALE OF PREFRENCES.

EXAMPLE OF SCALE OF
PREFRENCES.
Combination
b/w apples
and bananas

Level of
satisfaction
derived

Ranking order
of preference

(a) 12 Apples Highest

+ 12 Bananas

1st

(b)10 Apples Less than (a)

+ 19 Bananas

2nd

(c)5 Apples + 5 Less than (b)

3rd

Bananas

CHARACTERISTICS OF
SCALE
OF
PREFRENCES
It is drawn by a consumer in his mind.

It is drawn by a consumer in his mind.

It is based on the subjective valuation of
goods made by the consumer.
It is independent of the prices of goods
and consumers income.
Its differ from person to person.
It represent ordinal comparison of the
level of satisfaction derived by the
consumer from different combination of
goods.

DEFINATION OF
INDIFFERNECE SCHEDULE
An indifference schedule is a list of
alternative combinations in the stocks of
two goods which yield equal satisfaction to
the consumer. An indifference schedule
represents only equal satisfaction
combinations at a particular order of
preference while a scale of preference
represents all combinations yielding
different as well as equal levels of
satisfaction.

EXAMPLE OF INDIFFERENT
SCHEDULE
Combinati
on giving
equal
satisfactio
n
(a)
(b)
(c)
(d)

Apples
(X)

Bananas Marginal
(Y)
rate of
substitutio
n(Y)/(X)

1
2

12
8

3
4

5
3

----4/1 =
-4
-3/1 = -3
-2/1 = -2

DEFINATION
INDIFFERENCE CURVE
An indifference curve is the locus of
points representing all the different
combinations of two goods (say X and
Y) which yield equal utility and
satisfaction to the consumer. It is a
geometrical device representing all
such combinations of two goods
yielding equal satisfaction at a
particular level.

EXAMPLE OF
INDIFFERENCE CURVE

INDIFFERENCE MAP
An indifference map is a set of
indifferent curves. An indifferences
map represents the scale of the
preferences of a consumer regarding
various combination of the given two
goods. In the example given in the next
slide shows IC4 curve has highest
satisfaction and IC1 curve has the
lowest satisfaction.

EXAMPLE OF
INDIFFERENCE MAP

ASSUMPTIONS
A consumer is interested in buying two products

in combination.
He is able to rank his preferences and give a
complete ordering of the scale of preferences.
Non-satiation, i.e., the consumer always prefers
more quantities of goods to lesser quantity.
He is rational and his choices are transitive.
There is ordinal measurement of utility. so the
height of the indifference curve indicates the
level of satisfaction without quantification.

PROPERTIES OF
INDIFFERENCE CURVE
Indifference curve slope downwards

from left to right , i.e., they are

negatively sloped.
The are convex to the origin.
They cannot intersect each other.

SIMILARITIES OF
CARDINAL UTILITY AND
ORDINAL UTILITY :
Both the analysis are based on
the assumption that the
consumer is rational and he is
interested to maximize his total
utility.

Both the approaches follow the

proportionality rule. In one it is
between price and marginal
utility while in the other it is
between price and marginal rate
of substitution.
In Marshallian utility approach
the equilibrium condition for a
consumer is :
MUx/Px=MUy/Py. In J.K.Hicks
utility approach the equilibrium

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