Distinguish between cardinal utility approach and ordinal utility approach to consumer behavior. How can a consumer attain equilibrium und er ordinal utility approach? Explain with the help of diagram.
| Cardinal Utility | Ordinal Utility | |
|---|---|---|
| Meaning | Cardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption of good or service can be expressed numerically. | Ordinal utility states that the satifaction which a consumer derives from the consumption of good or service cannot be expressed numerical units. |
| Approach | Quantitative | Qualitative |
| Realistic | Less | More |
| Measurement | Utils | Ranks |
| Analysis | Marginal Utility Analysis | Indifference Curve Analysis |
| Promoted by | Classical and Neo-classical Economists | Modern Economists |
The Cardinal approach to Consumer Equilibrium posits that the consumer reaches his equilibrium when he derives the maximum satisfaction for given resources (money) and other conditions. A consumer is said to be highly satisfied when he allocates his expenditure in such a way that the last unit of money spent on each commodity yields the same level of utility.
The concept of how consumer reaches his equilibrium can be further comprehended through the one-commodity model and multiple commodity model. In one commodity model, the consumer equilibrium is determined when he consumes a single commodity while in the multiple commodity model, the consumer equilibrium is determined when he consumes two or more commodities.
Consumer’s Equilibrium – One Commodity Model: Suppose a consumer with a given amount of resources (money) consumes a single commodity, say X. For a consumer, both his income and commodity X will have respective utilities and he can either retain his income in the form of asset or can exchange it for the commodity X. If the marginal utility of commodity X (MUx) is greater than the marginal utility of money (Mum), then a utility-maximizing consumer will exchange his money income for a commodity.Based on the assumption, the marginal utility of a commodity is said to be declining with each successive unit and whereas the marginal utility of money remains constant,
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