Difference between ordinal and cardinal utility

Utility theory is used to analyze the behavior of individuals and firms in the world of economics. It explains what people want and helps explain why they make the decisions they do. Utility can be broadly categorized into two categories: ordinal and cardinal utility.

Ordinal utility

Ordinal utility is a relatively simple concept. It states that we only care about the order of preferences and do not give any importance to the levels of satisfaction between them.

For example, let’s assume someone likes pizza, burger, and hot dog, in that order. We don’t know how much more they like pizza than a burger or a hot dog. All we know is that they prefer pizza more than the other two.

Ordinal utility does provide a meaningful way to rank different preferences, but it fails to address the relative strength of the preferences.

Cardinal utility

The cardinal utility theory is a more complex idea that uses numbers to communicate the strength of preferences between options. It enables us to measure the difference in the level of satisfaction between different preferences.

For example, if someone has an apple and then eats another apple, they might like the second apple a little bit less than the first. We can quantify this difference in the level of satisfaction by assigning utility values.

Cardinal utility helps us understand the intensity of pleasure or happiness a consumer receives from consuming a good or service. It measures the utility of an item in terms of a specific unit, such as dollars or utils.

The main difference between the two

The key difference between ordinal and cardinal utility is that ordinal utility theory only establishes a preference ranking system, and cardinal utility theory measures the strengths or intensities of these preferences.

Cardinal utility is more informative than ordinal utility as it enables us to measure utility quantitatively. But ordinal utility theory is simpler and more manageable. In the practical world, ordinal utility theory is widely used, while cardinal utility is less commonly applied.

In conclusion, while both ordinal and cardinal utility theories have their strengths and weaknesses, they serve as a fundamental tool to understanding consumer behavior, which is vital for businesses and individuals seeking to tailor and provide goods and services that appeal to consumers.

Table difference between ordinal and cardinal utility

Ordinal vs Cardinal Utility

	Ordinal Utility	Cardinal Utility
Definition	Ordinal utility is a concept in economics that rank orders the preferences of consumers, but does not assign numerical values to them.	Cardinal utility is a concept in economics that assigns numerical values to the preferences of consumers.
Assumption	Ordinal utility assumes that consumers can only rank their preferences in order of most preferred to least preferred.	Cardinal utility assumes that consumers can assign numerical values to their preferences and compare them mathematically.
Measurement	Ordinal utility cannot be measured directly.	Cardinal utility can be measured through various mathematical techniques such as the utility function and the marginal utility.
Advantages and Disadvantages	Ordinal utility is simpler to understand and easier to apply in real-world situations, but it does not provide precise information about consumer preferences.	Cardinal utility provides more granular information about consumer preferences, but it is more complex to understand and apply.
Use	Ordinal utility is commonly used in economics to measure consumer preferences and to analyze market behavior.	Cardinal utility is less frequently used in economics, but it can provide valuable insights into consumer behavior and market outcomes.