Ordinal Utility Theory: Meaning & Assumptions
Meaning of Ordinal Utility Theory
J.R. Hicks and R.G.D. Allen, in 1934, propounded the theory of consumer behaviour based on the ordinal approach. According to this approach, a utility cannot be measured in any quantifiable number. It could only be measured by giving orders, ranks or preferences.
Hence ordinal utility means the consumer’s preferences or choice for one commodity or for a basket of goods over the other. Here, the preferences could be expressed in terms of ‘more’ or ‘less’ preferable.
Moreover, since the consumers have a limited income which they can spend on their consumption. Therefore, in this approach, a consumer will prefer a basket of goods over the other given the prices of the goods and the income of the consumer. This would be explained with the help of the budget line and indifference curve.
Assumptions of Ordinal Utility Theory
Rationality: A consumer is always rational, i.e., he always prefers more goods and services to derive maximum utility. Thus he always buys the commodity which gives him maximum utility first, and then he buys the least utility-giving commodity at the end.
Finite Money Income: The consumers have limited money income, which they spend on the purchase of all the goods and services for their living. Thus they allocate this income as their consumption expenditure on all goods and services.
Ordinal Utility: The utility derived from the consumption of each good or a basket of goods could be measured ordinally by giving preferences for each good over the other.
Transitivity and Consistency of Choice: The consumer’s preferences are always transitive i.e., if a consumer prefers good X over good Y and the same consumer prefers good Y over good Z then according to this assumption of transitivity, he must prefer good X over good Z also.
If, X>Y
If, Y>Z
Therefore, X>Z
Whereas as per consistency of choice, if a consumer prefers good X to good Y in one period then he must not prefer good Y to good X in another period or must not treat both the goods as equal.
Symbolically,
If, X>Y in one period
Then, Y>X or Y≠X in other period.
Non Satiety: According to this, a consumer always prefers more of a good or a larger quantity of all the goods because he has not reached the saturation level nor he is oversupplied with all the goods.
Diminishing Marginal rate of Substitution: Marginal rate of substitution refers to the rate at which a consumer substitute one good X for the other good Y so that the level of utility/ satisfaction obtained from it remains the same to him.
Symbolically,
MRS = ∆X/∆Y or ∆Y/∆X
According to this assumption, as a consumer continues to substitute X for Y or Y for X, his MRS diminishes/decreases.
Read More- Microeconomics
- Microeconomics: Definition, Meaning and Scope
- Methods of Analysis in Economics
- Problem of Choice & Production Possibility Curve
- Concept of Market & Market Mechanism in Economics
- Concept of Demand and Supply in Economics
- Concept of Equilibrium & Dis-equilibrium in Economics
- Cardinal Utility Theory: Concept, Assumptions, Equilibrium & Drawbacks
- Ordinal Utility Theory: Meaning & Assumptions
- Indifference Curve: Concept, Properties & Shapes
- Budget Line: Concept & Explanation
- Consumer Equilibrium: Ordinal Approach, Income & Price Consumption Curve
- Applications of Indifference Curve
- Measuring Effects of Income & Excise Taxes and Income & Excise Subsidies
- Normal Goods: Income & Substitution Effects
- Inferior Goods: Income & Substitution Effects
- Giffen Paradox or Giffen Goods: Income & Substitution Effects
- Concept of Elasticity: Demand & Supply
- Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
- Determinants of Price Elasticity of Demand
- Measuring Price Elasticity of Demand
- Price Elasticity of Supply and Its Determinants
- Revealed Preference Theory of Samuelson: Concept, Assumptions & Explanation
- Hicks’s Revision of Demand Theory
- Choice Involving Risk and Uncertainty
- Inter Temporal Choice: Budget Constraint & Consumer Preferences
- Theories in Demand Analysis
- Elementary Theory of Price Determination: Demand, Supply & Equilibrium Price
- Cobweb Model: Concept, Theorem and Lagged Adjustments in Interrelated Markets
- Production Function: Concept, Assumptions & Law of Diminishing Return
- Isoquant: Assumptions and Properties
- Isoquant Map and Economic Region of Production
- Elasticity of Technical Substitution
- Law of Returns to Scale
- Production Function and Returns to Scale
- Euler’s Theorem and Product Exhaustion Theorem
- Technical Progress (Production Function)
- Multi-Product Firm and Production Possibility Curve
- Concept of Production Function
- Cobb Douglas Production Function
- CES Production Function
- VES Production Function
- Translog Production Function
- Concepts of Costs: Private, Social, Explicit, Implicit and Opportunity
- Traditional Theory of Costs: Short Run
- Traditional Theory of Costs: Long Run
- Modern Theory Of Cost: Short-run and Long-run
- Modern Theory Of Cost: Short Run
- Modern Theory Of Cost: Long Run
- Empirical Evidences on the Shape of Cost Curves
- Derivation of Short-Run Average and Marginal Cost Curves From Total Cost Curves
- Cost Curves In The Long-Run: LRAC and LRMC
- Economies of Scope
- The Learning Curve
- Perfect Competition: Meaning and Assumptions
- Perfect Competition: Pricing and Output Decisions
- Perfect Competition: Demand Curve
- Perfect Competition Equilibrium: Short Run and Long Run
- Monopoly: Meaning, Characteristics and Equilibrium (Short-run & Long-run)
- Multi-Plant Monopoly
- Deadweight Loss in Monopoly
- Welfare Aspects of Monopoly
- Price Discrimination under Monopoly: Types, Degree and Equilibrium
- Monopolistic Competition: Concept, Characteristics and Criticism
- Excess Capacity: Concept and Explanation
- Difference Between Perfect Competition and Monopolistic Competition
- Oligopoly Market: Concept, Types and Characteristics
- Difference Between Oligopoly Market and Monopolistic Market
- Oligopoly: Collusive Models- Cartel & Price Leadership
- Oligopoly: Non-Collusive Models- Cournot, Stackelberg, Bertrand, Sweezy or Kinked Demand Curve
- Monopsony Market Structure
- Bilateral Monopoly Market Structure
- Workable Competition in Market: Meaning and Explanation
- Baumol’s Sales Revenue Maximization Model
- Williamson’s Model of Managerial Discretion
- Robin Marris Model of Managerial Enterprise
- Hall and Hitch Full Cost Pricing Theory
- Andrew’s Full Cost Pricing Theory
- Bain’s Model of Limit Pricing
- Sylos Labini’s Model of Limit Pricing
- Behavioural Theory of Cyert and March
- Game Theory: Concept, Application, and Example
- Prisoner’s Dilemma: Concept and Example