Utility and it's Types

 

Utility

It is generally used to describe the degree of satisfaction an individual receives from consuming a commodity. It can be understood as the power of a commodity to satisfy the wants of consumers.

For an example: A hungry person buys a burger expecting that the burger will curb his appetite. This means that the burger has utility.

Many economists state that utility can be measured numerically while there are many others who argue that utility is a subjective phenomenon, and thus can’t be expressed quantitatively.

This difference in opinion regarding measurement of utility has developed the concept of cardinal and ordinal utility

1.     Cardinal utility

It was developed by neo-classical economists like Marshall, Pigou, Robertson,etc. According to them, utility is a quantitative concept and that it can be measured in terms of a number. Hence they developed the concept of measuring utility through cardinal approach.

According to this concept, utility can be expressed in the same way that weight and height are expressed. However, the economists lacked a proper unit for utility. So they derived a psychological unit called ‘Util’. Util is not a standard unit because it varies from person to person, place to place and time to time.

For an example, if a person assigns 20 utils to a burger and 10 utils to a sandwich, we can understand that the burger has double the capacity to satisfy that man’s wants.

Since util is not a standard unit for measuring utility, many economists, including Alfred Marshall suggested measurement of utility in terms of money that consumers are willing to pay for a commodity.

If each rupee is equal to 1 util, a burger worth Rs 20 has 20 utils and a sandwich worth Rs 10 has 10 utils. Thus, whoever consumes burger will yield utility of 20 utils and those who consume sandwich will yield utility of 10 utils.

2.     Ordinal utility

It was developed by modern economists like Pareto, W.E Johnson, Stutsky, J.P Hicks and R.G.D Allen. Opposing to the concept of classical economists, modern economists claimed that absolute measurement of utility is not possible.

According to these economists, utility is subjective phenomenon, i.e. influenced by personal feelings, preference and opinions, and thus unquantifiable. However, they stated that utility can be clearly expressed in terms of rank.

For an instance, if a person prefers fruit juice to soda, it means fruit juice has more utility than soda. In this case, fruit juice can be placed in the first position and soda in the second, in terms of utility.

Difference between Cardinal Utility and Ordinal Utility

­Cardinal Utility	Ordinal Utility
It is developed by Alfred Marshall.	It is developed by J.R. Hicks and R.G.D Allen.
It can be measured in terms of numbers.	It can be compared or ranked whether it is higher or lower.
Money is used as measuring rod and marginal utility of money always remains constant.	Indifference curve is used as measuring instrument of utility and it does not assume marginal utility of money as constant.
Utility derived from each commodity remains constant.	It does not consider such assumption and it is based on transitivity and consistency assumptions.
There is no classification of goods.	There is classification of goods like Superior, Inferior, Griffen
There is no analysis of income effect, price effect and substitution effect.	Price effect, income effect and substitute effects are analyzed.
It is traditional theory and it based on so many unrealistic assumptions.	It is relatively modern theory and based on a few realistic assumptions.

Adopted from: https://www.businesstopia.net/economics/micro/concept-utility-cardinal-and-ordinal