Utility refers to usefulness, i.e. in terms of economics, Utility is defined as the satisfaction people derive from their consumption activities. It is seen that the concept of utility is often difficult to measure. However, just like all other mathematical variables, economists had tried to quantify ways to measure Utility in two different ways- Cardinal Utility and Ordinal Utility.
The concept of assigning a numerical value to utility refers to cardinal utility. The utility can be measured in Utils, which means units of utility. Hence all models incorporating cardinal utility uses the unit ‘util’ just like any other measurable quantity. For example, we can say that basket of apples gives a consumer a utility of 10, while bananas might give him a utility of 20.
However, with the course of time, the economist felt that it is not possible to determine the exact measurement of utility as the factors such as consumer’s taste or preferences vary accordingly. For instance, we say that, if a particular consumer gives apples a util value 15, it’s not necessary that he likes apple 50% in compared to the first consumer. Thus we can say that Utility cannot be measured in cardinal terms.
As the exact measurement of utility is not possible, economist introduced an alternative approach known as Ordinal Utility. Therefore the concept of Ordinal Utility uses rankings in place of values in order to understand the consumer behavior. The advantage of Ordinal Utility is that the subjective differences between consumers and products get eliminated and only the rank remains. For instance, a consumer might like apple more in compared to bananas and another consumer might like bananas more as compared to apples. Hence we can compare these easily with the help of ordinal utility.
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