Assumptions of the ordinal utility theory are given below:
(i) Rationality : A consumer is considered a rational being. His goal is to maximize his total satisfaction. Given his income and prices of goods and services he consumes, his decisions are consistent with his objective. Apart from this, they have full knowledge about their circumstances and circumstances which are essential for a rational decision.
(ii) Ordinal Utility : Unlike cardinal utility approach, ordinal utility approach assumes that utility is only ordinally measurable by consumer’s subjective evaluation. That is, a consumer is able to express only the order of his preferences.
(iii) Transitivity and Consistency of Choice : Consumer’s choices are assumed to be transitive. Transitivity of choice means that if a consumer prefers A to B and B to C, he must prefer A to C. Or, if he treats A = B and B = C, he must treat A = C. Consistency of choice means that if a consumer prefers A to B in one period, he must not prefer B to A in another period or treat them as equal, everything remaining the same. The transitivity and consistency in consumer’s choices may be symbolically expressed as follows :
Transitivity : If A > B, and B > C, then A > C.
Consistency : If A > B in one period, then B > A or B = A in another.
(iv) Non-satisfaction : Non-satisfaction means that the consumer is not able to reach the point of saturation in case of any commodity and he is not oversupplied with goods in question. Therefore, a consumer always likes a larger quantity of all the goods.
Uncompromising means that the consumer is not able to reach the point of saturation in the case of any object and the question of excess amounts of goods does not arise. Therefore, a consumer always likes a large amount of all the items.
(v) Diminishing Marginal Rate of Substitution : The marginal rate of substitution is the rate at which a consumer is willing to substitute one commodity (X) for another (Y) so that his total satisfaction remains the same. This rate is given by ∆Y/∆X. The assumption is that ∆Y/∆X goes on decreasing, when a consumer continues to substitute X for Y.
