Module 4 GST 104

Module 4
Utility
Unit 1: Meaning and concepts of utility
Unit 2: The law of Diminishing Marginal Utility
1
Unit 1
Meaning and concepts of utility
Content
1.0 Introduction
2.0 Learning Outcomes
3.0 Learning Content
3.1 Concept of Utility
3.2 Approaches to Utility Analysis
3.2.1 Cardinalist Approach
3.2.2 Ordinalist Approach
3.3 Types of Utility
3.3.1 Total Utility
3.3.2 Marginal Utility
3.3.3 Average Utility

4.0 Conclusion
5.0 Summary
6.0 Tutor-marked assignment

7.0 References/Further Reading
2
1.0 Introduction
The last module was devoted to studying the concept of elasticity. We looked at the responses of
consumers in terms of quantity demanded as changes take place in the factors affecting demand.
It is significant to note that consumers are rational utility maximisers and will stop further
consumption of a product when extra utility is Zero. This unit will therefore examine the concept
of utility for a better understanding of consumer behaviour.
At the end of the study, students will be able to:

i. Define utility
ii. Mention and explain the two approaches to utility analysis
iii. Explain the types of utility.
3.0 Learning Contents
3.1 Concept of Utility
Utility is the amount of satisfaction a person (consumer) desires from consuming a given unit(s)
of a commodity or service at a particular time. A commodity may be injurious or even pernicious,
but if it satisfies an economic want, it possesses utility. Subjectivity is associated with utility i.e
the satisfaction exists in the mind or being imagined by the consumer. Utility varies among
individuals.
3.2 Approaches to Utility Analysis

The two approaches to utility analysis are:
3.1.1 Cardinalist Approach
This assumes that utility can be measured in units which are called utils. If a consumer imagines
that one mango has eight utils and an apple, four utils, then, it implies that the utility of one mango
is twice that of an apple.
3.1.2 Ordinalist Approach
This is a modern approach to utility which argues that utility cannot be measured or expressed in
absolute terms but can only be ranked.
3.3 Types of Utility

3.3.1 Total Utility
This refers to the sum total of the utilities obtained by the consumer from different units of a
commodity. Suppose a consumer consumes two units of a commodity at a time and derived utility
as U1, U2. Then, his total utility for commodity Y(TUy) will be: TUy = U1 + U2.
3
3.3.2 Average Utility
The amount of utility satisfaction a person (consumer) derives from consuming a unit of a given
𝑇𝑈
commodity. It is derived by dividing the total utility by the quantity consumed, i.e AU = 𝑄 .
3.3.3 Marginal Utility

This refers to the extra satisfaction derived from consuming one additional unit of a commodity.
It is derived by subtracting the preceding total utility from the present total utility i.e. MU = MUU-
MUU-1. Alternatively, it can also be derived by dividing the change in total utility by the change
∆𝑇𝑈
in quantity consumed, i.e MU= ∆𝑄 .
4.0 Conclusion
In conclusion, utility is a subjective term as it only exists in the mind of the consumer. It varies
from one person to another.
5.0 Summary
The summary of what has been said so far is that utility, which denotes the satisfaction a consumer
derived from consuming a product is a relative terms. It increases at first and later diminishes as
more and more quantities of a commodity are consumed.
6.0 Tutor-Marked Assignment

1. What do you understand by the term utility?
2. List and explain two approaches to the analysis of utility.

Ohale, I., & Onyema, J.I. (2002). Foundations of Microeconomics. Amethyst& Colleagues
Publishers, Port Harcourt
Ray, P. (2000). A level Economics. Letts Educational Ltd., London.
4
Unit 2
The law of Diminishing Marginal
Utility
Content
1.0 Introduction
3.0 Learning Content
3.1 The Law of Diminishing Marginal Utility
3.2 Tabular and graphical representation of the law of DMU
3.3 Implication of the Law

4.0 Conclusion
5.0 Summary
6.0 Tutor-marked assignment
5
1.0 Introduction
The last unit introduced us to the concept of elasticity where we considered the meaning and types
of utility. Unity 2 is aimed at furthering our discussion on utility as we examine the law of
Diminishing Marginal Utility and its implication on consumer behaviour.

At the end of the lecture, students will be able to:
i. State the Law of Diminishing Marginal Utility
ii. Explain the relationship between total utility and marginal utility.
iii. Discuss the implication of the law on the behaviour of consumers
3.0 Learning Contents

3.1 The Law of Diminishing Marginal Utility
The law states that as more and more units of a commodity is consumed, the utility derived from
each unit decreases.
3.2 Tabular and Graphical Representation of the Law of Diminishing Marginal

Utility
The relationship between total utility and marginal utility can be explained with the help of Table
5 and Figure 13:
Table 5: Law of Diminishing Marginal Utility

Units Total utility in Marginal utility in
utils utils
0 0 0
1 20 20
2 35 15
3 45 10
4 50 5
5 50 0
6 45 -5
7 35 -10
6
Figure 13: Law of Diminishing Marginal Utility
* *
TU & MU
* *
45-
40-
TU
35- *
30-
25-
20- *
15- *
10- *
05- *
0- *
1 2 3 4 5 6 7 Units
-15- *
*
-10-
MU
In figure 13 above, the marginal utility (MU) curve is the Diminishing Marginal Utility Curve. It
shows that the MU diminishes as more and more units of the commodity are consumed.
So long as total utility is increasing, marginal utility is decreasing up to the 4th unit as indicated in
figure 1.when total utility is maximum at the 5th unit, marginal utility is zero. This is the point of
satiety for the consumer. When total utility is decreasing, marginal utility is negative (i.e. 6 th and
7th units). These units give disutility or dissatisfaction, so, it is no use having them.
4.0 Conclusion
From our discussion in this unit, it is obvious that for a rational consumer, utility maximization is
the major driver of behaviour. Thus, producers need to focus on how to produce goods/services
that help the consumer to achieve its objective of utility maximization. It is only then that
producers can also achieve the objective of profit maximization.
7
5.0 Summary
This unit can be summarized in one sentence: Consumers consume a product up to the point
where marginal utility equals zero. Beyond this point, every unit consumption results in disutility.
6.0 Tutor-Marked Assignment

1. State the law of Diminishing Marginal Utility
2. At what point on utility schedule does a consumer maximize utility?

Ohale, I., & Onyema, J.I. (2002). Foundations of Microeconomics. Amethyst& Colleagues
Publishers, Port Harcourt
Ray, P. (2000). A level Economics. Lets Educational Ltd., London.

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Module 4

2.0 Learning Outcomes

3.0 Learning Content

3.1 Concept of Utility

3.2 Approaches to Utility Analysis

3.2.1 Cardinalist Approach

3.2.2 Ordinalist Approach

3.3 Types of Utility

3.3.1 Total Utility

3.3.2 Marginal Utility

3.3.3 Average Utility

6.0 Tutor-marked assignment

2.0 Learning Outcomes

At the end of the study, students will be able to:

3.0 Learning Contents

3.1 Concept of Utility

3.2 Approaches to Utility Analysis

3.3 Types of Utility

3.3.3 Marginal Utility

6.0 Tutor-Marked Assignment

7.0 References/Further Reading

2.0 Learning Outcomes

3.0 Learning Content

3.1 The Law of Diminishing Marginal Utility

3.2 Tabular and graphical representation of the law of DMU

3.3 Implication of the Law

2.0 Learning Outcomes

3.0 Learning Contents

3.2 Tabular and Graphical Representation of the Law of Diminishing Marginal

Table 5: Law of Diminishing Marginal Utility

6.0 Tutor-Marked Assignment

7.0 References/Further Reading

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