Ordinal Utility Approach:

The basic idea behind ordinal utility approach is that a consumer keeps number of pairs of two
commodities in his mind which give him equal level of satisfaction. This means that the utility can be
ranked qualitatively.
The ordinal utility approach differs from the cardinal utility approach (also called classical theory) in the
sense that the satisfaction derived from various commodities cannot be measured objectively.
Ordinal theory is also known as neo-classical theory of consumer equilibrium, Hicksian theory of
consumer behavior, indifference curve theory, optimal choice theory. This approach also explains the
consumer's equilibrium who is confronted with the multiplicity of objectives and scarcity of money income.
The important tools of ordinal utility are:
1. The concept of indifference curves.
2. The slop of I.C. i.e. marginal rate of substitution.
3. The budget line.

Assumptions:
The ordinal utility approach is based on the following assumptions:
1. A consumer substitutes commodities rationally in order to maximize his level of satisfaction.
2. A consumer can rank his preferences according to the satisfaction of each basket of goods.
3. The consumer is consistent in his choices.
4. It is assumed that each of the good is divisible.
5. It is assumed that the consumer has full knowledge of prices in the market.
6. The consumer's scale of preferences is so complete that consumer is indifferent between them.
7. Two commodities are used by the consumer. It is also known as two commodities model.
8. Two commodities X and Y are substitutes of each other. These commodities can be easily
substituted in various pairs.

Cardinal Utility Approach:

According to this approach, the utility is measurable and can be expressed in quantitative terms. Cardinal
utility approach is also known as classical approach because it was presented by classical economists.

Concepts of Utility:
Following are important concepts of utility:
Utility:
The characteristics of a commodity or service is to satisfy a human want. The amount of satisfaction a
person derives from some commodity or service, is called utility.
Total Utility:
The amount of satisfaction a person derives from some commodity or service over a period of time, is
called utility. In other words, it is the sum of marginal utilities obtained from consumption of each
successive unit of a commodity or service. If continuous units of a commodity 'X' are consumed, then
TUx = MUx
Marginal Utility:
The extra amount of satisfaction to be obtained from having an additional increment of a commodity or
service. In brief, the change in total utility resulting from one unit change in the consumption of a
commodity or service per unit of time is called marginal utility. The following formula may be used to
measure it.
Marginal utility = Change in total utility / Change in quantity consumed
or
MU = TU / Q
or
MU = d TU / d Q
Initial Utility:
The amount of satisfaction to be obtained from the consumption of very first unit of a commodity or
service is called the initial utility e.g. the amount of satisfaction to be obtained from consumption of the
first apple is units. It is called initial utility of the consumer.
Positive Utility:
When a consumer consumes successive units of a commodity or service, its marginal utility decreases.
The utility obtained from the consumption of all the units of a commodity or service before reaching the
marginal utility equal to zero, is called positive utility.
Saturation Point:
By the consumption of that unit of a commodity where the marginal utility drops down to zero, is called the
saturation point.
Negative Utility:
By using the next unit of a commodity after saturation point, that unit gives negative satisfaction to the
consumer and marginal utility becomes negative, it is known as negative utility.

Util:
Although utility cannot be measured but in cardinal approach of consumer behavior, the term which is
used as a unit of utility is known as util and arithmetic numbers (1, 2, 3, .......) are used. For example X ate
an apple and got 10 util of utility.

DEFINITION OF 'LAW OF DIMINISHING MARGINAL

UTILITY'
A law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant - there is a decline in the
marginal utility that person derives from consuming each additional unit of that
product.
In economics, the marginal utility of a good or service is the gain from an increase, or loss from a
decrease, in the consumption of that good or service. Economists sometimes speak of a law of
diminishing marginal utility, meaning that the first unit of consumption of a good or service yields
more utility than the second and subsequent units, with a continuing reduction for greater amounts.
The marginal decision rule states that a good or service should be consumed at a quantity at
which the marginal utility is equal to the marginal cost..

Definition of 'Indifference Curve'

An indifference curve is a graph showing combination of two goods that give the consumer equal
satisfaction and utility.
Definition: An indifference curve is a graph showing combination of two goods that give the
consumer equal satisfaction and utility. Each point on an indifference curve indicates that a
consumer is indifferent between the two and all points give him the same utility.
Description: Graphically, the indifference curve is drawn as a downward sloping convex to the
origin. The graph shows a combination of two goods that the consumer consumes.

The above diagram shows the U indifference curve showing bundles of goods A and B. To the
consumer, bundle A and B are the same as both of them give him the equal satisfaction. In other
words, point A gives as much utility as point B to the individual. The consumer will be satisfied at any
point along the curve assuming that other things are constant.
1.

An indifference curve is a graph showing combination of two goods that give

the consumer equal satisfaction and utility. Definition: Anindifference curve is a graph
showing combination of two goods that give the consumer equal satisfaction and utility.

The Budget Line

Budget line is a graphical representation of all possible combinations of two
goods which can be purchased with given income and prices, such that the
cost of each of these combinations is equal to the money income of the
consumer. Alternately, Budget Line is locus of different combinations of the
two goods which the consumer consumes and which cost exactly his income.
A budget constraint represents all the combinations of goods and services that a consumer may
purchase given current prices within his or her given income. Consumer theory uses the concepts of
a budget constraint and a preference map to analyze consumer choices. Both concepts have a
ready graphical representation in the two-good case.

Consumer equilibrium
Consumer Equilibrium It refers to a situation under which a consumer spends his entire
income on purchase of a good in such a manner that gives him maximum satisfaction and he
has no tendency to change it.

The point at which a consumer reaches optimum utility, orsatisfaction, from

the goods and services purchased given the constraints of income and prices. This is based
on the assumptionthat consumers attempt to get maximum utility from their purchasesand
that competition exists for the item in question. Equilibrium is reached when the consumer
purchases the assortment of goods which best meets his satisfaction requirements given
his financialconstraints.