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The budget constraint

17 December, 2015 - 16:47

In the preceding section, we assumed that utility is measurable in order to better understand how consumers allocate their budgets, and how this process is reflected in the market demands that are observed. The belief that utility might be measurable is not too extreme in the modern era. Neuroscientists are mapping more and more of the human brain and understanding how it responds to positive stimuli. At the same time, numerous sociological surveys throughout the world ask individuals to rank their happiness on a scale of one to ten, or something similar, with a view to making comparisons between individual level and group level happiness. Nonetheless, not every scientist may be convinced that we should formulate behavioural rules on this basis. Accordingly we now examine the economics of consumer behaviour without this strong assumption. We assume instead that individuals are able to identify (a) different combinations of goods and services that yield equal satisfaction, and (b) combinations of goods and services that yield more satisfaction than other combinations. In contrast to measurable (or cardinal) utility, this concept is called ordinal utility, because it assumes only that consumers can order utility bundles rather than quantify the utility.

\mid Ordinal utility assumes that individuals can rank commodity bundles in accordance with the level of satisfaction associated with each bundle.

We may ask why it is necessary to develop further analytical tools. The answer is that different approaches provide different and extended insights into behaviour, and therefore increase our understanding of the marketplace.