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The concept of ordinal utility centers around an attempt to provide a ranking of market baskets that is ordered, or ordinal, based on which indifference curve the market baskets are on. An ordinal utility function is a utility function that generates a ranking of market baskets, where we can list all possible market baskets in the order of most to least preferred. However, ordinal utility makes no attempt to quantify how much one market basket is preferred to another (see cardinal utility). Ordinal utility can only provide a ranking of market baskets based on their corresponding indifference curves.
Let A be any market basket on l1, B be any market basket on l2, and C be any market basket on l3. Given the following indifference map, with three indifference curves produced by an ordinal utility function,
Where the ordinal utility function is defined as
- <math>\ U=F(x,y)=5xy <math>
We know that l3 is preferred to l2, which is preferred to l1, through ordinal ranking of the indifference curves. Also, C is preferred to B, which is preferred to A in terms of market baskets. It would be reasonable to assume that U=20 for l1, U=40 for l2, and U=60 for l3 in the utility function given above. However, we cannot go so far as to say that, for example, l2 gives twice as much utility as l1. Such an analysis would fall under cardinal utility.
See Also
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