Measurement of Utility

Measurement of Utility

The utility is a Psychological and Personal Concept. There is a difference of opinion, on whether measurement of utility can be done or not. The followings are the two approaches prevalent in this regard.

Cardinal Approach

The economist Marshall and Pigou etc. have their view that utility can be measured in the form of money. According to them, a person will agree to pay for a commodity; just equal to the utility, which he derives from that commodity. If a person is willing to spend more for a commodity, it means that he gaining more (excessive or surplus) utility from that commodity. In this way, it can be said that the price to be given for a commodity is a measurement of that commodity. For example, if a person is ready to pay 10 rupees for a coffee, the utility of that coffee for that person Will be equal to 10 rupees. Hence, it is clear from the above example that according to Prof. Marshall, the utility of a commodity can be expressed through Cardinal Numbers like 1,2,3,4 etc. When we express the utility of a commodity in this manner, it is called Ordinal Utility and this approach is called Cardinal Approach. In other words, according to this approach, the utility can be measured.

Ordinal Approach

Contrary to the above approach, some economists such as Perito, Ellen, Hicks etc. do not agree with the approach of Prof. Marshall and Prof. Pigou. According to these economists, the utility cannot be measured. These economists criticized the cardinal approach of Marshall, on the basis of the following points

1. Utility is a psychological concept, which cannot be measured in the form of money.
2. Utility remains unstable.
3. Money is not the correct measurement of utility because the -value of money keeps changing itself.
4. The amount of money, which we are ready to pay to purchase a commodity, it shows only the estimated utility of the commodity, not the actual utility.
5. Money is not the correct measurement of utility on the grounds that if a poor man is unable to purchase a cycle, it is difficult to conclude there is no utility in the cycle for him.

Prof. Pigou, who was a supporter of Marshall’s approach earlier; accepted later that only the intensity of desire can be measured by money, utility cannot be measured. Due to these difficulties’ Prof. Hicks and other economists have finally accepted that utility cannot be measured and they developed a new method of analysis, Indifference curve analysis the place of Utility analysis, in which there is no need to measure utility. In this method, only Ordinal Numbers 1st, 2nd, 3rd, and 4th (serial order) are given for utility. In this way, the utility of the shirt is more or less than that of bread as expressed by these serial numbers. Unit of utility has no meaning in Ordinal Approach. When measurement of the utility of a commodity is made, numbers are arranged in a serial order of their importance, such as, ‘First’, ‘Second’ and ‘Third’ etc. For Example – three students getting the highest numbers in a class are shown in an Ordinal Serial order of ‘First’, ‘Second’, and ‘Third’. When utility is given ordinal numbers, it is called Ordinal Utility and this approach is called Ordinal Approach.