1.2.4.1 Approaches to the theory of the consumer – cardinal versus ordinal approach

The theory of consumer behavior is a fundamental concept in economics that analyzes how individuals make choices to maximize their satisfaction (utility) given their limited resources. There are two main approaches to the theory of the consumer: the cardinal approach and the ordinal approach.

1. Cardinal Approach: The cardinal approach to the theory of the consumer assumes that utility can be measured and quantified numerically. According to this approach, consumers can assign numerical values (cardinal numbers) to their preferences and satisfaction for different goods and services. These cardinal utility numbers represent the consumer’s level of satisfaction or happiness from consuming a specific quantity of a good.

In the cardinal approach, economists often use a utility function to represent the consumer’s preferences mathematically. The utility function takes the form U = f(X, Y, Z, …), where U is the cardinal utility level, and X, Y, Z, etc., represent the quantities of different goods consumed. By comparing utility levels resulting from different combinations of goods, economists can predict a consumer’s choices and preferences.

However, the cardinal approach has some significant limitations. One major concern is that utility cannot be directly observed or measured in real-world terms. Additionally, interpersonal comparisons of utility (i.e., comparing one person’s utility level to another) are not meaningful in the cardinal approach.

2. Ordinal Approach: The ordinal approach to the theory of the consumer, on the other hand, does not rely on measuring or quantifying utility in cardinal numbers. Instead, it focuses on the ranking or ordering of consumer preferences. According to the ordinal approach, consumers can rank different consumption bundles or choices in order of their preference but do not assign specific numerical values to these rankings.

In the ordinal approach, economists use indifference curves to represent consumer preferences. An indifference curve is a graphical representation showing all the combinations of two goods that provide the same level of utility or satisfaction to the consumer. Higher indifference curves represent higher levels of utility, but no numerical value is assigned to the utility level.

The ordinal approach is considered more realistic and robust because it avoids the issues associated with measuring utility in cardinal terms. It allows economists to analyze consumer behavior without the need for interpersonal utility comparisons, making it more suitable for analyzing market behavior and deriving demand curves.

In contemporary economic analysis, the ordinal approach is widely accepted and has largely replaced the cardinal approach. It provides a more reliable and practical foundation for understanding consumer choices and market outcomes.