All Topics  
Ordinal utility

 

 
   Email Print
   Bookmark   Link
 

 

Ordinal utility
 
 
  Topics Ordinal utility Topic Home

Ordinal utility theory
Theory

For a more detailed account of theories as expressed in formal language as they are studied in mathematical logic see Theory A theory, in the general sense of the word, is an analytic structure designed to explain a set of observations....
 states that while the utility
Utility

In economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility....
 of a particular good and service cannot be measured using an objective scale, a consumer is capable of ranking different alternatives available. Goods are often considered in ‘bundles’ or ‘baskets’. For example, does individual A prefer 3 apples and 2 oranges or 3 oranges and 2 apples? When a large number of baskets of goods are compared, the preference
Preference

Preference is a concept, used in the social sciences, particularly economics. It assumes a real or imagined "choice" between alternatives and the possibility of rank ordering of these alternatives, based on happiness, satisfaction, gratification, enjoyment, utility they provide....
s of the individual can be seen.






Discussion
Ask a question about 'Ordinal utility'
Start a new discussion about 'Ordinal utility'
Answer questions from other users
Full Discussion Forum



Encyclopedia


Ordinal utility theory
Theory

For a more detailed account of theories as expressed in formal language as they are studied in mathematical logic see Theory A theory, in the general sense of the word, is an analytic structure designed to explain a set of observations....
 states that while the utility
Utility

In economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility....
 of a particular good and service cannot be measured using an objective scale, a consumer is capable of ranking different alternatives available. Goods are often considered in ‘bundles’ or ‘baskets’. For example, does individual A prefer 3 apples and 2 oranges or 3 oranges and 2 apples? When a large number of baskets of goods are compared, the preference
Preference

Preference is a concept, used in the social sciences, particularly economics. It assumes a real or imagined "choice" between alternatives and the possibility of rank ordering of these alternatives, based on happiness, satisfaction, gratification, enjoyment, utility they provide....
s of the individual can be seen. This information is usually put together on a graph called an indifference map. One of these is shown below:

Each indifference curve
Indifference curve

In microeconomic theory, an indifference curve is a graph of a function showing different bundles of good , each measured as to quantity, between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another....
 represents combinations of two goods or services which give the same level of utility to the consumer. The further a curve from the origin, the greater the level of utility. The slope of the curve (the marginal rate of substitution
Marginal rate of substitution

In economics, the marginal rate of substitution is the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of satisfaction....
 of X for Y – MRSxy) shows the rate at which the individual trades off good X against good Y. The curve is convex to the origin due to diminishing marginal utility
Marginal utility

In economics, the marginal utility of a Good or of a Service is the utility of the specific use to which an agent would put a given increase in that good or service, or of the specific use that would be abandoned in response to a given decrease....
. The usual assumptions about rational economic man have to hold for the indifference curve approach to work. It can also be shown that indifference curves (an ordinal approach) give the same results as cardinal utility
Cardinal utility

In economics, cardinal utility is a theory of utility under which the utility gained from a particular good or Service can be measured and that the magnitude of the measurement is meaningful....
 theory i.e. consumers will consume until the ratios between the marginal utility and the prices of all goods and services will be equal (the equi-marginal principle).

Another entirely different problem is whether ordinal utility is indeed an observable variable in real world. For example, in closed hypothetical system like above, there are only orange and apple to choose from. Therefore, when an individual choose orange, one can definitely say that an orange is preferred over an apple. However, in real world, when an consumer purchase an orange, it is often impossible to say what good or a set of goods or collection of behavioural choice (including not purchasing anything at all or doing something else) were discarded as options.

See also


  • consumer theory
    Consumer theory

    Consumer theory is a theory of microeconomics that relates preferences to supply and demand. The link between personal preferences, consumption, and the demand curve is one of the most complex relations in economics....
  • cardinal utility
    Cardinal utility

    In economics, cardinal utility is a theory of utility under which the utility gained from a particular good or Service can be measured and that the magnitude of the measurement is meaningful....
  • marginal utility
    Marginal utility

    In economics, the marginal utility of a Good or of a Service is the utility of the specific use to which an agent would put a given increase in that good or service, or of the specific use that would be abandoned in response to a given decrease....