Ordinal Utility Analysis

Unlike the Cardinal utility analysis, which measures utility by numbers, ordinal utility analysis compares utility across different goods and services. Under ordinal utility analysis, utility can't be measured in numbers but compared. So, instead of saying that an orange gives 6 utils and an apple gives 3 utils of utility, we say that an orange gives more utility to the consumer than an apple.

Ordinal utility analysis gives rise to the concept of indifference curve.

Indifference curve depicts the different combinations of two goods which gives the consumer the same level of satisfaction.

Consumer's Equilibrium using Marginal Utility Analysis

The Law of Diminishing Marginal Utility It has been observed that the desire to consume a commodity decreases as more and more units of that commodity are consumed. Therefore, every successive unit of the commodity consumed provides lesser utility than before. The Law of Diminishing Marginal Utility states that as more and more units of a commodity are consumed, the Marginal Utility derived from every successive unit of the commodity declines. This happens because psychologically, as a consumer starts to consume one unit of the good after another, the the consumers satisfaction reaches a saturation point. So, with every successive unit consumed, the additional utility the consumer derives goes on declining. Consumer's Equilibrium using Marginal Utility: Cardinal Analysis Consumer's equilibrium is that level of consumption at which the consumer is getting maximum satisfaction (benefit) while spending out of his given income across different goods and services, and has no tende

Understanding Trade-Offs in Economics: Balancing Choices for Optimal Outcomes

TRADE-OFFS Economics is concerned with people making decisions. However, these decisions are not always easy to make as making a decision involves making a choice. This choice may be between different alternatives/goals/options. Generally, choosing one goal means not being able to choose the other one. This results in what we call a trade-off where in order to choose one thing we have to let go or sacrifice the other one. Examples of Trade-Offs: P eople face numerous trade-offs in their daily lives. Let’s say a person wants to reach his office. He may either go by car or bicycle. Going by a bicycle is not only environmentally friendly but also is a good exercise. However, going by a car will save time and make him reach faster. This is a situation of trade-off where the person has to choose an option and in choosing one, he will be giving up the other one. A family which has a limited monthly budget has to decide whether to spend that money on a vacation, saving for their chil

What are Consumer Goods, Capital Goods and Intermediate Goods? With Examples

Consumer Goods, Capital Goods, Intermediate Goods After the production of a good or service, the next aim of the producer is to sell the good to the consumer. The consumer can be an individual or a firm; and the good when sold to the consumer can be consumed as it is or the good can be transformed into another good with the help of a productive process such as a machine. For example, when wheat is sold to a flour mill, it is converted into flour through the use of machinery. When a good is transformed into another good like in the case of wheat, it loses its specific characteristic during the production process. Such type of a good is known as intermediate good. When the goods are not further transformed into other goods, and are used as it is, it is known as final goods. So, the final goods are those which do not pass through any further production process or transformation and are used as it is by the consumers. The final goods can be of two types- Consumer goods and Capital

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