Definitions and measurements of utility

Reviewing literature on utility, Schumpeter (1963, 1060-62) distinguished between cardinal and ordinal concepts of utility. Cardinal concept suggests that utility of economic goods can be measured on a ratio scale while the ordinal concept suggests that it can be measured on ordinal scale only. Cardinal concept implies that you can measure utility as physicists can measure length and weight. Ordinal concept implies that you can compare utility of one thing with other things only in terms of more or less without assigning a fixed value to utility. Those who used the cardinal concept can further be divided into two groups: (a) those who believe that utility is a psychic reality that can be measured directly but which cannot be inferred from external facts of behaviour; and (b) those who believe that utility can be measured indirectly from “the sum of money a man is prepared to give up in order to obtain it rather than go without it”. Those who used ordinal concept relied more on the people’s capacity to “compare satisfactions expected from the possession of different sets of goods without measuring them”. This view of utility gave rise to familiar “indifference curves” in economics. Figure 15.1 shows the various indifference curves. They join those values of two goods B and A to which consumers are indifferent. It may be noted that the consumer cannot maximize the quantity of both because there is a budget constraint. The consumer wants to get on the highest indifference curve under a budget constraint.

There is a distinction between total utility and marginal utility. While increase in quantity of anything of utility would increase the total utility for a person the additional utility of an extra unit of that thing normally falls. Economists are mostly interested in defining utility as marginal utility, i.e., increase in utility from one extra unit. You may like a certain sweet. Suppose you get x amount of utility when you eat it first time. Do you think that if you are given one more piece of that you will get the same additional utility x? Further, imagine that you have already consumed five pieces. If someone gives you one more piece of the sweet you will refuse and surely, you will start resisting if you are offered one more piece of that sweet. There is no additional utility of that sweet after you have consumed five pieces. Actually there is a disutility now.