Utility is the capacity of goods and services to satisfy human wants. Now that we understand what utility is, it is debated as to how we can measure it. Measurement of utility in economics is necessary as it will determine the value of the goods and services.
Measure of Utility
We know that there are two approaches to utility – Cardinal Utility Approach and Ordinal Utility Approach. Utility is measured differently in both these approaches. While utility is measured in numerical values in the cardinal utility approach, it is ranked in order of preference in ordinal utility approach.
Cardinal Measurement of Utility in Economics
According to classical economists, utility can be measured in the same way as weight or height. It is assumed that utility can be measured in numerical terms. By using the cardinal measurement of utility in economics, it is possible to numerically estimate the value which a person derives from consumption of goods and services. But, there was no standard unit for measuring utility. So, economists derived an imaginary measure called utility. For example, you have just eaten an ice cream and a chocolate. You assign 20 utils as the utility derived from the ice cream. If you liked the chocolate less than the ice cream, you may assign it lesser number of utils or vice versa.
But, utils cannot be taken as a standard unit for measurement of utility in economics as it can vary from individual to individual. Hence, several economists suggested the measurement of utility in monetary terms. This means that utility can be measured in terms of money or price which the consumer is willing to pay for the goods or services. In the above example, suppose 1 util is assumed to be equal to Rs. 1. An ice cream will yield utility worth Rs 20, while the chocolate may yield utility worth Rs. 1. This is termed as value of utility in terms of money.
Ordinal Measure of Utility
Modern economists disregarded the concept of cardinal measurement of utility in economics. They believed that utility is an abstract and philosophical concept and thus cannot be measured in numbers and absolute terms. Therefore, they suggested that a consumer can rank various combinations of goods and services in order of his preferences. For example, if a consumer consumes two goods, apples and bananas, then he can indicate whether he prefers apple over a banana or the other way around, or whether he is indifferent between apples and banana i.e. both are equally satisfying.