It’s difficult to measure a qualitative concept such as utility, but economists try to quantify it in two different ways: cardinal utility and ordinal utility. Both of these values are imperfect, but they provide an important foundation for studying consumer choice.
In economics, utility simply means the satisfaction that a consumer experiences from a product or service. Utility is an important factor in decision-making and product choice, but it presents a problem for economists trying to incorporate it into microeconomics models. Utility varies among consumers for the same product, and it can be influenced by other factors, such as price and the availability of alternatives.
Cardinal utility is the assignment of a numerical value to utility. Models that incorporate cardinal utility use the theoretical unit of utility, the util, in the same way that any other measurable quantity is used. In other words, a basket of bananas might give a consumer a utility of 10, while a basket of mangoes might give a utility of 20.
The downside to cardinal utility is that there is no fixed scale to work from. The idea of 10 utils is meaningless in and of itself, and the factors that influence the number might vary widely from one consumer to the next. If another consumer gives bananas a util value of 15, it doesn’t necessarily mean that he likes bananas 50% than the first consumer. The implication is that there is no way to compare utility between consumers.
One important concept related to cardinal utility the law of diminishing marginal utility, which states that at a certain point every extra unit of a good will provide less and less utility. While a consumer might assign his first basket of bananas a value of 10 utils, after several baskets the additional utility of each new basket might decline significantly. The values that are assigned to each additional basket can be used to find the point at which utility is maximized or to estimate a customer’s demand curve.
An alternative way to measure utility is the concept of ordinal utility, which uses rankings instead of values. The benefit is that the subjective differences between products and between consumers are eliminated and all that remains are the ranked preferences. One consumer might like mangoes more than bananas, and another might prefer bananas over mangoes. These are comparable, if subjective, preferences.
Utility is used in the development of indifference curves, which represent the combination of two products that a certain consumer values equally and independently of price. For example, a consumer might be equally happy with three bananas and one mango or one banana and two mangoes. These are thus two points on the consumer’s indifference curve.