The basic viewpoint of ordinal utility theory: utility, as a psychological phenomenon, can neither be measured nor summarized, but can only express the level and order of satisfaction. So utility can only be expressed by ordinal number.
Ordinal utility theory adopts indifference curve analysis method. Ordinal utility theory uses the level of consumer preference to express the level of satisfaction. The theory is based on the following assumptions:
1, completeness, that is, you can tell the preference order of each commodity.
2. Transitivity, that is, consumers' preferences for different commodities are orderly and consistent. If a is greater than b and b is greater than c, then a is greater than C.
3. Insufficient satisfaction, that is, consumers think that the quantity of goods is always better.
Extended data:
1934, Hicks and Allen put forward that utility as a psychological phenomenon is unmeasurable, because it is impossible to find the measurement unit of utility; They reinterpreted the utility by using the "indifference curve" invented by edgeworth, thinking that what consumers do in the market is not to weigh the utility of goods, but only to sort them among different goods.
This is called ordinal utility theory. Ordinal utility theory tries to avoid the embarrassing assumption that utility can be directly measured, and provides a new analysis method for economics, namely indifference curve analysis.