Microeconomists Focus on Utility
There are many views about why people choose what they do, with psychologists and sociologists approaching the question in their own ways. In turn, microeconomists focus on one explanation for people making a given choice over another one: that the choice delivers more utility.
The idea of utility
Utility is a tricky term to pin down in concrete terms (see the nearby sidebar “The complex history of utility” for a discussion of the philosophical issues involved). Economists view utility as the value of someone’s choice, whether that value derives from their happiness or whatever their motivation. Utility is not measurable directly in any particular set of units, but it is revealed when someone makes a choice between options. If a person chooses tea over coffee, then to an economist the person must have gained a greater amount of utility as a result of that choice.
Contrasting two ways of approaching utility: Cardinal and ordinal
In general, you can look at utility in two ways:
Cardinal utility: The less often used of the two options, cardinal utility attempts to measure utility and so requires a unique level of utility associated with each possible choice of a bundle of goods (called the consumption bundle). Often that utility is measured in an invented unit called utils.
Ordinal utility: Ordinal utility establishes a ranking from the ordering of choices, so that it tells you the order in which things are preferred. To see how this approach can affect the way an economist chooses to use utility in models, we walk you through an example.
Consider the following example of a consumer to illustrate the two utility options in practice. Allan has three possible goods (tea, coffee, and cocoa) and has measured (in his own way) the utility he receives from consuming a unit of the three delicious hot beverages available. For a system of cardinal utility, you need to be able to ascribe a level of utility to each unit consumed, just as Allan does.
|Good||Utility from Consuming the Good|
As the table shows, Allan prefers tea to coffee, and coffee to cocoa. Therefore, you can rewrite the table so that Allan’s preferences are expressed as ranks to provide the ordinal utility.
|Good||Utility from Consuming the Good||Rank of Choice|
As you can see, the ordinal utility preferences preserve the ranking of the preferences without using a particular value for utility. Crucially, therefore, you can easily transfer any representation of utility that’s cardinal into an ordinal representation — just by writing down the numbers in order. For cardinal utility, you need to know something more exact about what a person values than economists usually know about a person, and so by the principle of fewest assumptions, you encounter ordinal utility more often than cardinal.