Differentiate between the cardinal approach and the ordinal approach to the study of consumer demand theory.

The cardinal approach to consumer demand theory is based on the assumption that consumers have the ability to measure the level of satisfaction or utility they obtain from the consumption of a good or service. In this approach, utility is considered to be a measurable and quantifiable concept that can be expressed in cardinal numbers, such as 1, 2, 3, etc. This approach is primarily associated with classical economists like Alfred Marshall, who used concepts like the marginal utility and total utility to analyze the behavior of consumers.

The ordinal approach to consumer demand theory assumes that consumers cannot measure utility in cardinal numbers. Instead, consumers can only rank their preferences for various goods or services in order of preference. That is, they can tell which good or service they prefer more, but they cannot quantify the difference in the level of satisfaction obtained from them. This approach is primarily associated with neoclassical economists, like John Hicks and R.G.D. Allen, who came up with the concepts of indifference curves and the marginal rate of substitution (MRS) to analyze consumer behavior.

1. Measure of Utility: The cardinal approach assumes that utility is measurable and can be expressed in cardinal numbers, while the ordinal approach assumes that utility can only be ranked in order of preference and not measurable in cardinal numbers. 2. Concept of Marginal Utility: The cardinal approach uses the concept of marginal utility to analyze consumer behavior. In contrast, the ordinal approach replaces the concept of marginal utility with that of the marginal rate of substitution (MRS) which shows the rate at which a consumer is willing to substitute one good for another to maintain an identical level of satisfaction. 3. Utility Function Representation: In the cardinal approach, the utility function can be represented using a numerical function, while in the ordinal approach, the utility function can be represented using an indifference map that shows a set of indifference curves. 4. Relevance of Income and Price Effects: The cardinal approach explains the income and substitution effects separately, while the ordinal approach combines both income and substitution effects in the Slutsky Equation. 5. Giffen Goods Paradox: The cardinal approach faces the paradox of Giffen goods, which are inferior goods where demand increases as the price increases. The ordinal approach resolves this paradox by introducing the concept of income and substitution effects. In conclusion, while both the cardinal and ordinal approaches are useful in understanding consumer demand theory, the ordinal approach has gained prominence due to its more realistic assumptions about consumers' ability to rank preferences rather than measuring them in cardinal numbers.