Ordinal utility analysis
Also called: Ordinal approach, Ordinal utility, Indifference curve analysis · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
Ordinal utility analysis (Hicks and Allen, 1934) is a way to study consumer choice without measuring utility in numbers. Utility means the satisfaction a good gives. Here the consumer only ranks bundles as better, worse or equally good. It is built with indifference curves, the budget line and the marginal rate of substitution. It replaced the older cardinal approach, because in real life nobody measures satisfaction in units, but people can rank what they like.
Example
A student cannot say a samosa gives "40 units" of satisfaction. She can still say that 2 samosas and 1 tea is better than 1 samosa and 1 tea, and that 1 samosa and 2 teas is just as good as 2 samosas and 1 tea. Ranking like this is all the ordinal approach needs.
Don't confuse with
- Cardinal utility analysis: it assumes utility can be measured in numbers (for example, "this shirt gives 50 units"). Its optimum condition is MUx/Px = MUy/Py. The ordinal optimum is MRS = p₁/p₂.
Related concepts
- Indifference curve
- Marginal rate of substitution
- Law of diminishing marginal rate of substitution
- Convexity of indifference curve
- Perfect substitutes
- Monotonic preferences
- Indifference map
- Properties of indifference curves
- Utility function
- Revealed preference