Cardinal and Ordinal Utility
Introduction:
Utility refers to the satisfaction that a consumer obtains from the purchase and use of commodities and services. According to economics there are two theories that are able to measure the satisfaction of individuals. These are the cardinal utility theory and the ordinal utility theory. There are a number of differences between the two in the methodologies that they use to measure consumption satisfaction
Cardinal Utility
Cardinal utility states that the satisfaction the consumer derives by consuming goods and services can be measured with numbers. Cardinal utility is measured in terms of utils (the units on a scale of utility or satisfaction). Goods and services that are able to derive a higher level of satisfaction to the customer will be assigned higher utils and goods that result in a lower level of satisfaction will be assigned lower utils. Cardinal utility is a quantitative method that is used to measure consumption satisfaction.

Ordinal Utility
Ordinal utility states that the satisfaction the consumer derives from the consumption of goods and services cannot be measured in numbers. Ordinal utility uses a ranking system in which a ranking is provided to the satisfaction that is derived from consumption. Goods and services that offer the customer a higher level of satisfaction will be assigned higher ranks and the opposite for goods and services that offer a lower level of satisfaction. Ordinal utility is a qualitative method that is used to measure consumption satisfaction.
What is the difference between Cardinal and Ordinal Utility? i. Cardinal and ordinal utility are theories that are used to explain the levels of satisfaction that a consumer derives from the consumption of goods and services. There are a number of differences between the methods in which either measure consumption satisfaction. ii. Cardinal utility is a quantitative measure, ordinal utility is a qualitative measure. iii. Cardinal utility a customer can assign a number to a product that when consumed was able to satisfy their needs while using ordinal utility a customer can rank the products according to the level of satisfaction that was derived. iv. Cardinal utility assumes that consumers derive satisfaction through consumption of one good at a time while ordinal utility assumes that a consumer may derive satisfaction from the consumption of a combination of goods and services which will then be ranked according to preference.

Theories based on Cardinal Utility Approach
There are two important laws to explain consumer’s behavior based on the cardinal utility approach. They are the following: * The Law of Diminishing Marginal Utility or Gossen's First Law * The Law of Equi-Marginal Utility or Gossen’s Second Law
Assumptions of the Cardinal Utility Approach
The principle of cardinal utility is based on the following assumptions: i. Utility is Measurable
The basic assumption of cardinal utility approach is that utilities of commodities are quantifiable. According to Alfred Marshall, money acts as a measuring rod to measure utilities of commodities. Utility is measured based on the amount of money that a customer is willing to pay for the particular commodity. ii. Marginal Utility of Money is Constant
Marginal utility of money is assumed to be constant. This means that money must measure the same amount of utility in all circumstances. In other words, the utility derived from each unit of money is constant. This is necessary because money is used to measure utility of a commodity

iii. Rationality
The cardinal utility approach assumes that the consumer is rational. This means that the consumer tries to maximize his or her utility with given income.
Summary:
Cardinal and Ordinal Utility
• Utility refers to the satisfaction that a consumer obtains from the purchase and use of commodities and services. According to economics there are two theories that are able to measure the satisfaction of individuals. These are the cardinal utility theory and the ordinal utility theory.
• Cardinal utility states that the satisfaction that the consumer derives by consuming goods and services can be measured with numbers.
• Ordinal utility states that the satisfaction that the consumer derives from the consumption of goods and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system in which a ranking is provided to the satisfaction that is derived from consumption.
• While cardinal utility is a quantitative measure, ordinal utility is a qualitative measure.
• In cardinal utility, it is assumed that consumers derive satisfaction through consumption of one good at a time. However, in ordinal utility it is assumed that a consumer may derive satisfaction from the consumption of a combination of goods and services, which will then be ranked according to preference.
References
Peart, S. J. and Levy, D. M. (2005), From Cardinal to Ordinal Utility Theory. American Journal of Economics and Sociology.
Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory". Journal of Political Economy, University of Chicago Press.