Utility, when used in economics, refers to that satisfaction which is achieved by the consumer when he or she consumes the good or service. The more the satisfaction greater will be the utility of good or service which in turn will lead to higher demand for that particular good or service. It is very difficult to measure the utility as it is different for different individuals. However there are two approaches for measuring utility one is the cardinal approach of utility and other is the ordinal approach of utility, let’s look at both the approaches in detail.
Cardinal Approach of Utility
Cardinal approach of utility is based on the assumption that utility can be quantified or measured. The measurement for measuring utility is called utils, so for example if you consume one ice cream and that ice cream will provide you with utility of 50 utils and if you consume one cup of tea and it provides you with utility of 30 utils than according to this approach you have 20 utils more when you consume ice cream as compared to consumption of tea.
However during winters when the requirement of tea is more than above situation is reversed as consumer derive more utility from a cup of tea than a cup of ice cream. Hence above concept only measures utility in quantifiable form rather than giving any judgment about the preference of the consumer. It also avoids any comparison as it measures the utility independently.
Ordinal Approach of Utility
The ordinal approach of utility is completely different from the cardinal approach of utility because it does not measure utility in any quantifiable form rather it states that utility helps the consumer in choosing or ranking the products. Hence in the above case of tea and ice cream if consumer derives more utility from ice cream as compared to tea than he or she will prefer ice cream over tea and if he or she has limited funds than he or she will use it for the purchase of ice cream rather than tea. In simple words consumer surplus is more if consumer consumes ice cream as compared to tea.
In simple words, under the ordinal approach of utility, there is no quantification of the utility rather it only gives the ranking of preference of the consumer in choosing good or service which gives the consumer maximum satisfaction. Hence under this approach, one can compare the utility derived from two products and then decide which product or service gives higher utility without putting any number to it.
As one can see from the above that both cardinal and ordinal approach are the measurement of utility but both are completely different when it comes to measurement of utility. However as an economist, one should use both the concepts together so that one can have clear idea about the concept of the utility of any good or service for the consumer.