Differentiating Cardinal and Ordinal Approaches on Consumer Behaviour and Evaluating the Usefulness of Elasticity

ECONOMICS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Question 1........................................................................................................................................3
A. Differentiate ordinal and cardinal and equilibrium position on consumer behaviour............3
B. Evaluating usefulness of the concept of elasticity..................................................................6
Question 2........................................................................................................................................7
A. Components of aggregate demand of GDP............................................................................7
B.GDP not a measure of well-being of nation.............................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Economics is being classified as micro-economics and macro-economics. Micro
economics is used to study in on individuals and organization decisions which focus on demand
and supply of goods and service affected with price and other factor, while macroeconomics is
been focused on the decision of whole country and government (Jansen, Schollmeyer and
Augustin, 2017). This report includes the cardinal and ordinal approaches on consumer
behaviour and usage of elasticity. While macro-economic shows the aggregate demand and their
components.
MAIN BODY
Question 1
A. Differentiate ordinal and cardinal and equilibrium position on consumer behaviour.
Utility shows the satisfaction level of the consumer and it differs from consumer to
consumer. The utility can be denoted from cardinal approach and ordinal approach.
Cardinal approach explain that satisfaction level gain after consuming the goods and
service and the utility can be hold and measurable. Consumer can measure quantitative cardinal
in terms of size, which shows level of satisfaction is gained from the goods and service. While in
actual terms, cardinal utility is measured in terms of money which shows the purchasing power
of consumers. For example: Marshal consume two goods and get 60 utility from pizza but 40
utility from burger. Cardinal approach can be measured as utile which is less practical in real
terms.
Cardinal approach to consumer equilibrium states that when the satisfaction level of consumers
is reached it shows the equilibrium point of consumer with the given resources and other factors.
While a consumer is highly satisfied when consumer allocates this expenditure in such a way
that give same level of satisfaction by money spending on each commodity. The two equilibrium
model of consumer satisfaction are:
1. Consumer equilibrium in single commodity Model: This model shows, when the
consumer consumes single commodity with given amount of money, income can retain
or spend on single commodity to gain utility. If the marginal utility of commodity X
(MUx) is more the marginal utility of money (MUm), consumer will spend this money to
gain maximum of commodity X. Whereas, after the maximum utility gained from

commodity X, marginal utility start declining by consuming additional units while
marginal utility of money remains constant. Thus, consume will reach at his equilibrium
point when,
MUx=Px(MUm).
In the above graph, P1 is the price of commodity X and shows the quantity used by
consumer which gives utilities. Whereas, E1 is the equilibrium point of commodity X and MUx
shows the downward sloping of marginal curve. At point above E1 consumer exchange
commodity and consume it since its more than marginal utility of money which results in
increase in satisfaction level. Below point E1 consumer gets less utility and reduce the
consumption of commodity X (Kobus and Morawski, 2019).
2. Consumer Equilibrium in multiple commodity Model: In real life consumer consume more
than one good and service rather than single commodity. It has been assumed that consumer
spends limited income on goods and service that drive from different commodities to gain utile.
While all the different commodities have their different marginal utility which is gain from
Illustration 1: Consumer equilibrium of single commodity