Consumer Behavior: Cardinal and Ordinal Approaches
1. Introduction to Consumer Behavior
Consumer behavior in economics refers to the study of how rational individuals allocate their
limited income among alternative goods and services in order to maximize satisfaction (utility).
It is grounded in the assumption that consumers are rational decision-makers who aim to achieve
the highest possible level of satisfaction subject to constraints such as income and prices.
The theory of consumer behavior is central to microeconomics, as it provides the foundation for
deriving demand functions and understanding market behavior.
2. Concept of Utility
Utility is defined as the want-satisfying power of a commodity. It is a subjective concept that
varies across individuals and situations.
Types of Utility
1. Total Utility (TU):
The aggregate satisfaction derived from consuming a given quantity of goods and
services.
2. Marginal Utility (MU):
The additional satisfaction obtained from consuming one additional unit of a commodity.
The relationship between total utility and marginal utility is fundamental in understanding
consumer choice.
3. Cardinal Approach to Consumer Behavior
The cardinal approach, also known as the Marshallian utility analysis, assumes that utility can
be measured quantitatively in absolute units called "utils."
The Core Idea: Putting a Number on Happiness
The Cardinal Approach (championed by economist Alfred Marshall) assumes that if you
consume something, you can assign an exact numerical value to how much you enjoyed it.
Let's say you are really hungry and eat an apple. You might say, "That apple gave me 20
utils of satisfaction."
If you then eat a banana and enjoy it twice as much as the apple, you would say, "That
banana gave me 40 utils."
3.1 Theoretical Foundation
This approach was developed by Alfred Marshall and is based on the idea that consumers can
assign numerical values to their level of satisfaction derived from goods and services.
3.2 Assumptions of the Cardinal Approach
1. Utility is measurable in cardinal terms.
2. The marginal utility of money remains constant.
3. Consumers are rational and aim to maximize utility.
4. Utilities of different goods are independent.
5. The law of diminishing marginal utility holds true.
3.3 Law of Diminishing Marginal Utility
The law states that, ceteris paribus, "holding other things constant." as the quantity of a
commodity consumed increases, the marginal utility derived from each additional unit decreases.
This law reflects the saturation of human wants and forms the basis of downward-sloping
demand curves.
The Law of Diminishing Marginal Utility is one of the most fundamental rules of consumer
behavior in economics.
In simple terms, it states that as you consume more and more units of a specific good, the
additional satisfaction you get from each new unit goes down. To understand the law
completely, it helps to break down the terms:
Utility: The economic word for "satisfaction" or "benefit."
Marginal: The economic word for "additional" or "extra."
Diminishing: Decreasing or dropping.
So, put together, it means your additional satisfaction keeps dropping.
A Real-World Example: The Pizza Scenario
Imagine you have been working hard all day and you are absolutely starving. You order a large
pizza.
Slice 1: You take the first bite, and it is the best thing you have ever tasted. It gives you a
massive amount of satisfaction (let's say 50 utils).
Slice 2: You are still hungry, so the second slice is great, but it’s not quite as magical as
that very first bite. (It gives you 30 utils).
Slice 3: You are starting to get full. You eat it, but you don't really need it. (It gives you
10 utils).
Slice 4: You are totally stuffed. If you force yourself to eat this slice, you might actually
feel sick. (Your marginal utility is now zero, or even negative!).
Even though the pizza itself never changed—every slice was cooked exactly the same way—the
value you placed on each additional slice dropped because your need was already being satisfied.
Why Does This Law Matter in Business Economics?
This law is the exact reason why the Law of Demand works (why people only buy more if the
price drops).
Because a consumer gets less and less satisfaction from every extra unit they buy, they are not
willing to pay the full price for the 2nd, 3rd, or 4th item. To convince them to buy more, a
business has to lower the price.
This is exactly why you see sales tactics like:
"Buy One, Get One 50% Off!"
"Combo Meals" (where adding a drink and fries is cheaper than buying them separately).
3.4 Law of Equi-Marginal Utility
Also known as the law of substitution, it states that a consumer will allocate income among
different goods in such a way that the marginal utility per unit of money spent is equalized across
all goods.
This condition ensures maximum total utility given a fixed income.
3.5 Consumer Equilibrium (Cardinal Approach)
A consumer is in equilibrium when:
The marginal utility per unit of expenditure is equal across all goods, and
Total expenditure equals total income.
3.6 Limitations of the Cardinal Approach
1. Utility cannot be measured objectively.
2. The assumption of constant marginal utility of money is unrealistic.
3. The independence of utilities is impractical.
4. It ignores the interaction between goods (substitutes and complements).
5. It oversimplifies complex human behavior.
4. Ordinal Approach to Consumer Behavior
The ordinal approach, also known as indifference curve analysis, rejects the idea of measurable
utility and instead assumes that consumers can rank their preferences.
This approach was developed by John Hicks and Roy Allen.
4.1 Fundamental Assumptions
1. Consumers are rational.
2. Preferences are complete and transitive.
3. Utility is ordinally measurable (ranked, not quantified).
4. Consumers prefer more to less (non-satiation).
5. Diminishing marginal rate of substitution holds.
4.2 Indifference Curves
An indifference curve represents all combinations of two goods that yield the same level of
satisfaction to the consumer.
Here is a simple breakdown of exactly what this graph is showing, based on the pizza and burger
example:
1. The Blue Line (Indifference Curve 1 - IC1)
This line represents a specific level of happiness/satisfaction. Look at the black dots on the blue
line:
Point A (2, 6): 2 Burgers and 6 Pizza Slices.
Point B (3, 4): 3 Burgers and 4 Pizza Slices.
Point C (4, 3): 4 Burgers and 3 Pizza Slices.
Point D (6, 2): 6 Burgers and 2 Pizza Slices.
Because all these points sit on the exact same blue line, the consumer is perfectly indifferent
between them. They get the exact same amount of satisfaction whether they choose combination
A, B, C, or D.
2. The Shape of the Curve
Downward Sloping: Notice how the line goes down from left to right. If you move from
Point A to Point B, you are gaining 1 Burger, but to keep your satisfaction at the same
level, you must give up 2 Pizza slices.
Bowed Inward (Convex): Notice how the line curves like a "U" towards the bottom left
corner (the origin). At point A, when you have lots of pizza (6 slices), you are willing to
give up 2 whole slices just to get 1 more burger. But down at point C, when you only
have 3 pizza slices left, you are only willing to give up 1 slice to get another burger. This
is the Law of Diminishing Marginal Utility in action!
3. The Green and Red Lines (An Indifference Map)
The Green Line (IC2) and Red Line (IC3) represent higher levels of total satisfaction.
Any point on the green line gives you more food overall than the blue line. Any point on
the red line gives you even more.
A rational consumer will always want to jump to the highest curve possible (the red one),
assuming they have enough money in their budget to afford it!
Properties of Indifference Curves
1. Downward sloping
2. Convex to the origin
3. Do not intersect
4. Higher curves indicate higher satisfaction
4.3 Effects of Price Changes
1. Substitution Effect
A change in consumption resulting from a change in relative prices, holding real income
constant.
2. Income Effect
A change in consumption resulting from a change in real income due to a price change.
These effects together explain the price effect and the downward-sloping demand curve.
4.4 Limitations of the Ordinal Approach
1. It is more abstract and complex.
2. It assumes rationality, which may not always hold.
3. Empirical measurement of indifference curves is difficult.
5. Comparative Analysis: Cardinal vs Ordinal Approach
Basis Cardinal Approach Ordinal Approach
Measurement of Utility Measurable (cardinal) Not measurable (ordinal ranking)
Analytical Tool Marginal utility Indifference curves
Realism Less realistic More realistic
Assumption of Money Constant MU of money No such assumption
Consideration of Substitution Ignored Explicitly included
6. Conclusion
The theory of consumer behavior has evolved from the cardinal to the ordinal approach,
reflecting a shift from quantitative measurement to qualitative ranking of preferences. While the
cardinal approach laid the foundation of utility analysis, the ordinal approach provides a more
realistic and comprehensive explanation of consumer choice by incorporating substitution effects
and relaxing restrictive assumptions.