Cardinal Utility vs. Ordinal Utility

Customer satisfaction is the behavior or attitude of the customer towards a service provider. One should never undervalue the importance of customer satisfaction. Always remember,

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“A loyal customer is a walking advertisement.”

To be successful, all organizations must fulfill the needs, wants, and demands of their customer. That is the reason why behind the success of many big companies. Moreover, customer satisfaction and loyalty have a positive effect on an organization’s profitability.

Many researchers have looked into the importance of customer satisfaction and find out the ways of measuring it numerically. It is because having a satisfied customer is not enough, and there have to be extremely satisfied customers. There are many theories available that describe the level of customer satisfaction. However, there are two predominant theories of utility cardinal utility and ordinal utility that measures the amount of pleasure, happiness, and satisfaction achieved by the consumer.

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The main difference between cardinal utility and ordinal utility is the numbers. Cardinal utility measures the level of satisfaction of a consumer numerically, whereas according to the ordinal utility, the level of customer satisfaction cannot be calculated in terms of number.

Comparison Chart

Basis Cardinal Utility Ordinal Utility
Definition According to the cardinal utility, the satisfaction derived by consumers after consuming the goods or services can be measured in numbers According to the ordinal utility, the satisfaction derived by consumers after consuming the goods or services cannot be measured in numbers
Founder Alfred Marshall founds this theory J R Hicks founds this theory
Measurement It is measured in utils It is measured in ranks
Measuring Order According to the cardinal utility, the goods and services providing higher satisfaction are rendered higher utils According to the ordinal utility, the goods and services providing higher satisfaction are given higher ranks which means the consumption providing highest satisfaction is bestowed the first rank
Realistic It is less realistic and convincing It is more practical and sensible
Analysis It follows the marginal utility analysis It follows indifference curve analysis
Methodology Quantitative Qualitative
Example For example, a cup of cappuccino is 3 utils whereas a cup of tea is 2 utils For example, a cup of cappuccino is ranked 1st whereas a cup of tea is ranked 2nd
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What is Cardinal Utility?

Cardinal utility is the oldest theory of demand that enables consumers to rank the magnitude in terms of countable numbers of how much they prefer one good to another. Look at this example below to thoroughly understand the practical meaning of this theory:

You own a Mazda car that gives 3,000 units of utility, whereas your friend owns an Audi that offers 7,000 units of utility. It means one needs $3,000 to pay for a used Mazda car, while $7,000 is required to get hands-on Audi. In other words, the price of cardinal utility is directly proportional to the price we are willing to pay.

This theory is an important concept in utilitarianism and Neo-classical economics. Jeremy Bentham talked about utility as maximizing pleasure and minimizing pain. Cardinal utility analysis of demand is grounded on certain important assumptions. Before enlightening how cardinal utility analysis explains consumer’s equilibrium regarding the need for a good, it is necessary to describe the basic assumptions on which the entire utility analysis rests.

We may see later, that cardinal utility analysis has been condemned because of its unrealistic assumptions. According to the theory, the utility is measurable and quantifiable units, and a person can express utility or satisfaction he derives from the goods in the quantifiable cardinal terms. Thus, a person can say that he gets utility equal to 20 units from the consumption of a unit of good B, and 30 units from the consumption of a unit of good C.

Moreover, the cardinal measurement of utility entails that a person can compare utilities derived from goods in respect of size, that is, how much one level of utility is better than another. A person can also describe that the utility he acquires from the consumption of one unit of good C is double the utility he obtains from the consumption of one unit of good B.

Benefits

The concept of cardinal utility helps each of us to have an outlook regarding the utility of a product in different ways. Cardinal Value is the acceptance that economic benefits can be directly measured and valued.

What is Ordinal Utility?

According to the ordinal utility, the satisfaction of the consumers derived by the consumption of goods or services cannot be measured numerically. This theory is proposed by the modern economist named J.R.Hicks and R.G.D Allen.

As against the concept of cardinal utility where neoclassical economists claim that the utility can be calculated and represented with the help of the cardinal numbers, modern economists propose that the psychological phenomena cannot be assessed objectively, quantitatively, or even numerically.

If explained simply, the measurement of ordinal utility is qualitative, based on the ranking of the product’s tastes. For example, presume someone prefers to have orange over apple and then a banana. Then this person can rank his preferences as orange > apple > banana.

Benefits

The theory of ordinal utility follows a single product analysis in which the utility of one component is supposed to be independent of the other. Alfred Marshall stopped addressing substitutes and complementary products by bringing them together as one product.

The indifference curve approach in ordinal utility is a two-product analysis which addresses consumer behavior in case of alternatives products. It is, therefore, equal to the study of the utility analysis.

Key Differences

  1. Cardinal utility can be measured numerically, while ordinal utility cannot be expressed numerically.
  2. “Utils” is the unit of cardinal utility and is used to measure it, whereas the ordinal utility has no such units. Instead, it is measured with the help of the ranking of the priority that each product has in your life when compared.
  3. The cardinal utility method is proposed by Alfred Marshall and his supporters, while the ordinal utility method is proposed by Allen & JR Hicks.
  4. Cardinal utility is mainly focused on the study of marginal utility. Whereas, the theory of ordinal utility is based on the research of indifference curves analysis.
  5. Cardinal utility is less practical, such as it is not likely possible to calculate the quantitative utility of every single product. Whereas, the ordinal utility is more realistic because it depends on qualitative measurement.
  6. The ordinal utility claims that the satisfaction that the customer derives after using a product or service cannot be measured in numbers. While the cardinal utility is the utility in which the satisfaction derived by consumers from the consumption of goods or services can be expressed numerically.

Conclusion

There are many theories proposed by the researchers that describe the level of satisfaction. However, cardinal utility and ordinal utility are two predominant theories of utility. The theory of cardinal utility was formulated by Neo-classical economists who explained that utility is measurable and can be expressed quantitatively or cardinally such as, 1, 2, 3, and the number goes on. In cardinal utility, the satisfaction of the consumers after the consumption of goods or services is measured in “utils”. It is presumed that one util is equal to one unit of money. However, with time, it is realized that the cardinal measurement of utility is not possible, thus this theory was labelled as less realistic. Whereas, the theory of ordinal utility was formulated by Prof. J.R.Hicks, who explained that the satisfaction which a consumer derives from the consumption of products or services could not be measured numerically. This theory measures the satisfaction of consumers in terms of “ranks” such as 1st, 2nd, 3rd, and the list goes on. This theory is believed to be more realistic and practical because it relies on qualitative measurement.

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