Describe the two measurement method of utility.
|NU Year||Set: 4.(c) Marks: 4 Year: 2012|
The measurement of utility has always been a controversial issue. Neo-classical economists, such as Alfred Marshall, Leon Walrus, and Carl Manager believed that utility is cardinal or quantitative like other mathematical variables, such as height, weight, velocity, air pressure, and temperature.
Therefore, these economists developed cardinal utility concept to measure the utility derived from a good. They developed a unit of measuring utility, which is known as utils. For example, according to the cardinal utility concept, an individual gains 20 utils from ice-cream and 10 utils from coffee.
However, modern economists, such as J.R. Hicks, gave the concept of ordinal utility of measuring utility. According to this concept, utility cannot be measured numerically, it can only be ranked as 1, 2, 3, and so on. For instance, an individual prefers ice-cream than coffee, which implies that utility of ice-cream is given rank 1 and coffee as rank 2.
Let us discuss these two concepts in detail in the next sections.
1. Cardinal Utility Concept:
The neo-classical economists propounded the theory of consumption (consumer behavior theory) on the assumption that utility is cardinal. For measuring utility, a term ‘util’ is coined which means units of utility.
Following are the assumptions of the cardinal utility concept that were followed by economists while measuring utility:
a. One util equals one unit of money
b. Utility of money remains constant
However, over a passage of time, it has been felt by economists that the exact or absolute measurement of utility is not possible. There are a number of difficulties involved in the measurement of utility. This is because of the fact that the utility derived by a consumer from a good depends on various factors, such as changes in consumer’s moods, tastes, and preferences.
2. Ordinal Utility Concept:
Cardinal utility approach is based on the fact that the exact or absolute measurement of utility is not possible. However, modern economists rejected the cardinal utility approach and introduced the concept of ordinal utility for the analysis of consumer behavior.