Write short notes on assumptions of ordinal utility approach
1. Consistency: The ordinal utility approach assumes that individuals have consistent preferences, meaning that they can always rank different options or alternatives based on their utility. This assumption assumes that people's preferences are stable over time and across different situations.
2. Transitivity: Another assumption of the ordinal utility approach is that individuals have transitive preferences. This means that if an individual prefers option A to option B, and option B to option C, then they will also prefer option A to option C. Transitivity ensures that preferences are logical and do not contain contradictions.
3. Independence: The ordinal utility approach assumes that individuals make decisions based solely on the attributes of the alternatives and not on other factors. This assumption assumes that individuals are not influenced by external factors such as price, income, or availability when making their choices. It assumes that preference orderings are independent of these factors.
4. Monotonicity: The ordinal utility approach assumes that individuals always prefer more of a good to less of it. In other words, as the quantity of a good increases, the individual's utility also increases. This assumption implies that individuals always prefer higher levels of consumption to lower levels.
5. Continuity: The ordinal utility approach assumes that individuals have continuous and smooth preference functions. This means that small changes or increments in the quantity of a good or a change in its attributes will only result in small changes in the individual's utility. This assumption allows for the analysis of marginal utility and the effects of small changes in consumption.
6. Cardinality: While the approach is called "ordinal" utility, it assumes that utility can be measured on a cardinal scale. This means that individuals can assign numerical values to their preferences, even though the actual magnitude of utility cannot be measured. The assumption allows for comparing and analyzing different levels of utility.
It is important to note that these assumptions are simplifications of real-world decision-making processes and may not always hold true in practice. However, they provide a useful framework for analyzing and understanding individual preferences and choices in economics.