myz-vgb.ru A Business Encyclopedia

Ordinal Utility

Definition: The Ordinal Utility approach is based on the fact that the utility of a commodity cannot be measured in absolute quantity, but however, it will be possible for a consumer to tell subjectively whether the commodity derives more or less or equal satisfaction when compared to another.

The modern economists have discarded the concept of cardinal utility and instead applied ordinal utility approach to study the behavior of the consumers. While the neo-classical economists believed that the utility can be measured and expressed in cardinal numbers, but the modern economists maintain that the utility being the psychological phenomena cannot be measured theoretically, quantitatively and even cardinally.

The modern economist, Hicks, in particular, have applied the ordinal utility concept to study the consumer behavior. He introduced a tool of analysis called “Indifference Curve” to analyze the consumer behavior. An indifference curve refers to the locus of points each showing different combinations of two substitutes which yield the same level of satisfaction and utility to the consumer.

Assumptions of Ordinal Utility Approach

  1. Rationality: It is assumed that the consumer is rational who aims at maximizing his level of satisfaction for given income and prices of goods and services, which he wish to consume. He is expected to take decisions consistent with this objective.
  2. Ordinal Utility: The indifference curve assumes that the utility can only be expressed ordinally. This means the consumer can only tell his order of preference for the given goods and services.
  3. Transitivity and Consistency of Choice: The consumer’s choice is expected to be either transitive or consistent. The transitivity of choice means, if the consumer prefers commodity X to Y and Y to Z, then he must prefer commodity X to Z. In other words, if X= Y, Y = Z, then he must treat X=Z. The consistency of choice means that if a consumer prefers commodity X to Y at one point of time, he will not prefer commodity Y to X in another period or even will not consider them as equal.
  4. Nonsatiety: It is assumed that the consumer has not reached the saturation point of any commodity and hence, he prefers larger quantities of all commodities.
  5. Diminishing Marginal Rate of Substitution (MRS): The marginal rate of substitution refers to the rate at which the consumer is ready to substitute one commodity (A) for another commodity (B) in such a way that his total satisfaction remains unchanged. The MRS is denoted as DB/DA. The ordinal approach assumes that DB/DA goes on diminishing if the consumer continues to substitute A for B.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Shares

Related pages


malthusian cycledefinition stressormeaning of retrenched in hindimethods of appraising performancevalue chain analysis michael porterwhat is budgetary deficitarbitrage strategy definitionoligopoly market definitionpeter schumpeterbusiness turnaround plandefine laissez-faire leadershipvertical marketing networkdesigning pay levels mix and pay structuresearning capitalization modelkanban stock controldividend payout definitionansoff growth matrixreverse repo rate definitionbureaucracy by max weberkarl pearsonsnowball sampling method definitiontheory of collective bargainingexample of retrenchment strategychit fund examplestapel scale exampleinelastic demand exampleequipment leasing meaninglaw of equal marginal utilityconcept of indifference curvemarketing micro and macro environmentdefinition of consumer psychologyinventory management meaning in hindiordinal versus cardinalmeaning of subsidiary in hindimirr definitiondefinition of classical management theorydebenture defineindifference curvesvrooms theory of motivationdefinition of operantporters five modelmiller & modiglianidefine reorder quantitycarrot definitionadvantages and disadvantages of retained profitleasing agreement definitionmonopoly definitionsquota sampling meaningcharacteristics of an oligopoly market structurewhat is meant by the term utilitylicensing and franchising definitionvague meaning in hindimeaning of slr and crrrevitalising meaninggap analysis in strategic managementexample of rationingmeaning of outlaysegmenting consumer marketsindia post office monthly income schemeblake & mouton's managerial gridkinked graphwhat is the meaning of recruitment in hindiinventory replenishment definitionconsumer buying behaviour definitionmanpower planning definitionmeaning of monopolistic competitiondescriptions of ethical theories and principleshenri fayol theorychronic unemployment meaninggilt funds meaningwhat is turnaround strategystress and stressors definitionwhat are the three major types of vertical marketing systemserg definitiondefinition of itemizedsnowballing samplingspearman rank correlation coefficientsdefinition of penetration pricingwhat is the difference between finance lease and operating lease