Ordinal Utility:

Early economists of the Spanish Scholastic tradition of the 1300s and 1400s described the economic value of goods as deriving directly from this property of usefulness, and their theories were based on prices and monetary exchanges. This approach implies that it is comparable. Ranking allows one to express satisfaction. One can compare commodities and assign them ranks, such as first, second, tenth, and so on. It displays the preference order. An ordinal approach is a qualitative method for calculating utility.

This idea of utility was not quantitative but rather a qualitative property of an economic good. Later economists, particularly those of the Austrian School, expanded on this concept to develop an ordinal theory of utility, or the concept that individuals could order or rank the usefulness of various discrete units of economic goods. This type of framework was used by Austrian economist Carl Menger to help him solve the diamond-water paradox, which had perplexed many previous economists, in a discovery known as the marginal revolution. Because the first available units of any economic good are allocated to the most highly valued uses and subsequent units are allocated to lower-valued uses, the ordinal theory of utility is useful for explaining the law of diminishing marginal utility and fundamental economic laws of supply and demand. According to some economists, ordinal utility is a more realistic approach to utility theory. The majority of consumers do not use a scoring system to make purchasing decisions. They simply know their preferences and base their choices on them.

Limitation of Ordinal Utility:

1) It is based on the assumption that there are only two goods or two baskets of goods. It is not always the case.

2) It is difficult to assign a numerical value to the concept of utility.

3) The consumer’s selection should be either transitive or consistent. It is never possible.

Cardinal Utility:

Utility is defined by Bernoulli and other economists as a quantifiable or cardinal property of the economic goods that a person consumes.

Economists use a unit known as a “util” to represent the amount of psychological satisfaction generated by a particular good or service for a subset of people in different situations, to aid in this quantitative measurement of satisfaction.

This approach assumes that it is measurable. Cardinal numbers, or quantitative numbers such as 1, 2, 3, and so on, can be used to express one’s satisfaction. It reveals a customer’s preference in cardinal measurement. It is calculated in utils.

The idea of a measurable util allows economic theory and relationships to be treated using mathematical symbols and calculations.

Nevertheless, it differentiates economic utility theory from actual observation and experience because “utils” can be observed, measured, or contrasted between various economic products or individuals. If a person determines that a piece of lasagna will yield 10 utils and a bowl of spaghetti will yield 12 utils, that person will know that eating the spaghetti will be more satisfying. Knowing that the average bowl of pasta will yield two additional utils will allow spaghetti producers to price spaghetti slightly higher than pizza. Furthermore, utils can fall as the number of products or services consumed rises. The first slice of lasagna may yield 10 utils, but the utils may decrease as people become full. This process will show consumers how to maximise their utility by allocating their money among various types of goods and services, as well as industries how to structure tiered pricing.

Cardinal utility is part of rational choice theory, which argues that people work to achieve utility maximization. Cardinal utility is also critical for efficient good allocation and welfare economics. When marginal cost (the cost of each additional good) and marginal utility (the value of each additional good) are equal, an economy achieves allocative efficiency.

Limitation of Cardinal Utility:

1) In the real world, utility cannot always be measured.

2) It is not possible to combine different types of satisfaction from different goods.

3) It is assumed for measurement that the utility of the consumption of one good is independent of that of another.

4) It does not consider the impact of a price change.