Measurement of Utility

Written By Unknown on Thursday 20 June 2013 | 14:59

Utility being an introspective phenomenon cannot be directly measured in a precise manner. Economist however adopted an indirect measurement of utility in terms of ’price’ a consumer is willing to pay for a given commodity. When a consumer is willing to pay a high price for a commodity, it means there is high utility estimated by him for that commodity and vice versa. But, this is just a rough indication it suggests no precise and proportionate measurement of utility. 

From the stand point of theory, however, there are 2 basic approaches to the measurement of utility namely: 
  1. Cardinal approach 
  2. Ordinal approach 
The cardinal measurement of utility was propounded by prof. Alfred Marshall and his followers. According to them utility of a commodity is quantifiable hence measurable numerically. They assume that for a consumer an apple may yield 10 utils (utils is the term used by Marshall for expressing the measurement of imaginary units of utility or satisfaction) while mango may yield 30 ‘utils’. Thus, utility of a mango is 3 times more in proportion to a utility of an apple. Such a numerical measure is imaginary. When a utility statement is tabulated as a schedule of utility, it is referred to as the cardinal measurement of utility. 

The terms cardinal and ordinal have been taken from mathematics. The numbers 1,2,3,4,5,6, etc are cardinal in the sense that number 6 is twice the size of number 3 and number 4 is twice the size of 2. In the cardinal analysis, the utility contained in commodities are made quantifiable. For example: an orange may yield to a consumer utility of 10 units whereas a mango yields 20 units. From this it is clear that the consumer derives twice as much utility from a mango compared to an orange. The units of measurements are purely imaginary and the cardinal analysis termed the imaginary units of utility of ‘utils’. 

On the other hand Prof Hicks Allen and their followers among the modern economists have suggested an ordinal measurement of utility. In their view utility cannot be quantified so its numerical expression is unrealistic. 

The ordinal measurements are 1st, 2nd, 3rd, 4th, 5th, 6th etc. It is not possible from this ranking to know the actual size of related number. The 2nd need not be twice as that of 1st, the size may be of any pattern. For example: 1st, 2nd, 3rd, could be 10, 15, 25, or 10, 20, 45 or 55, 65, 95 etc. According to ordinalists, utility being subjective and a mental concept cannot be measured and to quantify utility is absurd. 

Ordinal approach contains that the theory of consumer behaviour can be explained or analyzed even without measuring utility as the cardinal approach does. In the all ready stated example the ordinalists say that the consumer prefers a banana to an orange and rank the commodities in the scale of preferences without taking the trouble of measuring the imaginary quantum of utility. This method of ordinal approach is also called’ indifference curve approach’. 

Dr. Alfred Marshall and his followers advocated the cardinal approach to utility, while, the modern economists like Hicks, Allen, supported the ordinal approach. Hence the cardinal approach has come to be known as, ”Marshallian utility analysis” and the ordinal approach is called ‘Hicksian’s indifference approach’.

Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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