Answer to Question #130568 in Microeconomics for charity

Question

clearly differentiate between ordinal approach and cardinal approach and which one is preferred and why

Answer 1

Both cardinal and ordinal approaches are used to explain consumer behaviour in the theory of consumer behaviour.

The cardinal approach assumes that utility can be measured and in weights called utils. Thus, it claims that different choices can be attached a utility value, for example, a consumer can claim that he/she prefers a banana to an apple because a banana gives him/her 10 utils whereas an apple only yields 7 utils. This therefore means, under cardinal approach, a consumer can easily rank the magnitude of how much they prefers one choice (one good) to another.

The cardinality approach is therefore valued much in rational choice theory where consumers are believed to make optimal choices in order to maximize utility. It is also important in welfare economics which attempts to place a value on every consumption. In most cases, prices are used as better measures of utility.

However, the ordinality approach believes that utility cannot be measured. Consumers are believed to only being able to rank their choices in terms of preferences without being able to assess how much they prefer one choice to another. As an example, a consumer can say that he/she prefers a banana to an apple, but he/she cannot measure the exact numerical difference of the level of utility between the two.

Under the ordinality approach, preferences are shown by means of an indifference map. The higher the indifference curve in an indifference map, the higher the level of utility. Thus, using the above example, when drawing on an indifference map, bananas will have a higher indifference curve than apples.

The ordinality approach is more preferred to the cardinality approach because of the following reasons:

• Unlike the cardinal approach, it explains the law of demand more realistically,

• It explains Marshallian proportionality rule in a better way but establishing that the consumer attains equilibrium where the budget line is tangential to the highest attainable indifference curve,

•It explains the dual effect of price, that is, the income effect and the substitution effect, which the cardinal approach fails to explain,

• The ordinality approach is free from the assumption of the constant marginal utility of money,

• It came up with a better classification of goods; complements and substitutes, and normal and inferior,

• It studies a combination of two goods, unlike the utility theory (cardinal approach) which bundles them into one, and

• It explains the concept of diminishing marginal utility in a realistic way by replacing it with the principle of diminishing marginal rate of substitution (MRS).

The ordinality approach is therefore prefered to the cardinality approach because it is more realistic.