The ordinal utility theory (ordinal approach to analysis) was proposed by Edgeworth, Pareto, and Fisher. In the 30s of the 20th century, it was finally finalized and is currently considered the most common. Let us further consider what the ordinal theory of utility is .
General information
The ordinal theory of utility considers the subjective satisfaction that the buyer receives from the good. This concept is based on several axioms. It is worth saying that the opinions of economists about their number and names differ. So, some authors point to two, others - to three axioms.
Cardinalist utility theory
She is represented by the views of the Austrian school. The quantitative theory of utility assumes that the cost of one unit of good is reduced to labor costs and is determined by the degree of importance of the need satisfied by this unit. As the latter was proposed by. e. The cardinalist theory of utility is based on Gossen's postulates. The general idea of the provisions was as follows. A rational buyer will increase consumption until the marginal utility of one good equals that of another. This principle is called Gossen's second law. If you interpret this rule in modern language, it will be formulated as follows. A buyer with a limited amount of resources should receive from each good as much as is necessary to equalize the utilities for each of them individually. Subsequently, it was proved that the indicator cannot be measured. The usefulness of the good is a subjective category. Accordingly, it is impossible to evaluate it in a uniform way for all. In this regard, an alternative concept arose - the ordinal theory of utility .
Comparative characteristics
The ordinalist theory of utility differs from the cardinalist theory in that it does not take into account subjective preferences. For analysis, the concept uses modeling. It allows you to visualize the essence of the concept, to illustrate the action of axioms. In addition, the ordinalist theory of utility differs from the cardinalist theory in that it considers possible a qualitative analysis of satisfaction from the use of goods.
Essence of the concept
The ordinal theory of utility is based on the principle that marginal satisfaction with benefits cannot be measured. Only the order of preference for sets can be evaluated. The consumer does not measure the satisfaction of each individual good, but the utility from a certain group of them. Within the framework of the concept, the buyer organizes his preferences. He systematizes the choice of a particular group of benefits according to the degree of satisfaction. For example, the consumer considers the first set more useful for himself, the second - less, the third - even less, and so on. Such a systematization allows us to identify customer preferences regarding groups of objects. Moreover, the ordinal theory of utility does not allow us to establish differences in satisfaction from sets of goods. Simply put, in a practical sense, the buyer can determine the group of objects to which he will give preference. However, he cannot establish how much one is better than the other.
Axioms
As mentioned above, the opinions of experts regarding their number differ. For a better understanding of the concept, we consider three axioms. Consumer equilibrium in the ordinalist theory of marginal utility implies ordering of preferences. The buyer can always either name the best set of goods, or recognize their equivalence. The second axiom implies the transitivity of preferences. This means that in order to make one or another decision, the buyer needs to sequentially rearrange the priorities. Preferences from one set of goods are transferred to others. The axiom of unsaturation of needs says that buyers always prefer a larger amount of any good to a smaller one. This principle, however, does not apply to so-called anti-good. They have negative utility, as they reduce the level of well-being of the buyer. Such anti-benefits can be called noise, air pollution.
Indifference curve and budget line
The first graphical preference system was used in 1881 by Edgeworth. The indifference curve and the budget line in the model always have a touch point. The latter plays the role of a limiter of many available goods. The budget line reflects the sets, upon purchase of which the buyer completely spends the allocated money. It crosses the axis at points illustrating the maximum amount of benefits that the subject can get for his means at certain prices. The restriction indicates that total expenditure should be the same as income. With a decrease or increase in the latter, the budget line shifts. All sets corresponding to its points are available to the buyer. Those above and to the right are worth more. Accordingly, they are not available to the buyer. The indifference curve illustrates a set of sets for which the consumer makes no distinction. Any group of benefits provides the same level of satisfaction. Simply put, the graph shows alternative sets that have the same level of utility.
The properties
The indifference curve has the following properties:
- Located above and to the right of the other line is considered more preferable for the buyer.
- Always has a negative slope. This is due to the fact that rationally operating consumers prefer a larger volume of any group of goods to a smaller one.
- It has a concave shape. This is due to a decrease in marginal rates of substitution.
- Never crosses another curve. As a rule, segments illustrate decreasing norms of substitution of one good for another.
Sets on curves that are more distant from the origin are given more preference than those on less distant lines.
Map
It is used to describe the preferences of the subject for all groups of products and clothing. A curve map is a way of depicting a utility function for a specific customer. It allows you to get an idea about the tastes of an individual consumer. The map shows the rate of substitution of two goods at any level of their consumption. When it is said that the tastes of customers are known, the whole family of curves is meant, not the current ratio of two specific products. On the map, each curve covers points of equal utility.
Replacement rate
This concept is considered the main working term in ordinal theory. The replacement rate reflects the number of units of good that the buyer should refuse to purchase an additional unit of another product. In other words, it expresses the ratio of the maximum utility of two products. The marginal norm measures the desire of the subject to exchange one product for each unit of goods of another set. However, he does not gain and does not lose satisfaction from the use of the good. The marginal rate is an indicator according to which one product is replaced by another without loss or gain of utility. The values of this quantity are always negative. This is due to the fact that an increase in the number of purchased units of one product implies a decrease in the use of another. Due to the fact that the indifference curve has a convex shape directed to the origin, the norm most often decreases in the course of consumption growth. This phenomenon is called a decreasing maximum rate of substitution.