Utility

Suppose you went to a restaurant and ordered your favorite

food. What will you experience? Either the food satisfies your
taste buds or not. Another day you went to another
restaurant an ordered the same food. Is the experience the
same? Maybe or may not be.
Similarly, if you eat your favorite ice-cream you will be
happy. What will happen in the second round? Happy, Right?
Will you be satisfied one after the other rounds? No!
The satisfaction of a consumer is the basis of the utility
function. It measures how much one enjoys when he or she
buys something. A utility is a measure of how much one
enjoys a movie, favorite food, or other goods. It varies with
the amount of desire. One can conclude the following
conclusions
 Definition
The simple meaning of ‘utility’ is ‘usefulness’. In
economics utility is the capacity of a commodity
to satisfy human wants.
Utility is the quality in goods to satisfy human
wants. Thus, it is said that “Wants satisfying
capacity of goods or services is called Utility.”
According to Prof. Waugh:
“Utility is the power of commodity to satisfy
human wants.”
According to Fraser:
“On the whole in recent years the wider
definition is preferred and utility is identified,
with desireness rather than with satisfyingness.”
 Characteristics of Utility
 Utility has no Ethical or Moral Significance
 Utility is Psychological
 Utility is always Individual and Relative
 Utility is not Necessarily Equated with
Usefulness
 Utility cannot be Measured Objectively
 Utility Depends on the Intensity of Want
 Utility is Different from Pleasure
 Utility is also Distinct from Satisfaction
 Different Types of Utility
Form Utility:
This utility is created by changing the form or
shape of the materials. For example—A cabinet
turned out from steel furniture made of wood
and so on. Basically, form utility is created by the
manufacturing of goods.
 Continue……
Place Utility:
This utility is created by transporting goods from
one place to another. Thus, in marketing goods
from the factory to the market place, place
utility is created. Similarly, when food-grains are
shifted from farms to the city market by the
grain merchants, place utility is created.
Transport services are basically involved in the
creation of place utility.
 Continue……
Time Utility:
Storing, hoarding and preserving certain goods over a
period of time may lead to the creation of time utility
for such goods e.g., by hoarding or storing food-grains
at the time of a bumper harvest and releasing their
stocks for sale at the time of scarcity, traders derive
the advantage of time utility and thereby fetch higher
prices for food-grains. Utility of a commodity is always
more at the time of scarcity. Trading essentially
involves the creation of time utility.
 Continue……
Service Utility:

This utility is created in rendering personal

services to the customers by various
professionals, such as lawyers, doctors,
teachers, bankers, actors etc.
 Can Utility be Measured?
Utility is a psychological concept. This is different for different people.
Therefore, it cannot be measured directly. Professor Marshall has said
that “Utility can be measured and its measuring rod is ‘money. The price
which we are ready to pay for an article is practically its price. Nobody will
be prepared to pay more than the utility which we derive from the article.

For example:
If I am ready to pay Rs. 1500 for a watch and Rs. 2,000 for a Radio. Then I
can say that I derive utility from that watch up to the value of Rs. 1500;
and from Radio up to the value of Rs. 2,000. “The inference which we can
draw from the above example is that the price which we pay for any
article is the utility which we derive from that article.” But Prof. Hicks,
Allen and Pareto have not supported Marshall’s view of measuring utility.
They are of this opinion that measuring
of utility is not possible because of the
following reasons:
(i) Utility is personal, psychological and abstract view
which cannot be measured like goods.
(ii) Utility is different for different people. Utility is always
changeable and it changes according to time and
place. Therefore, it is difficult to measure such thing
who is of changeable nature.
(iii) Further, measuring material ‘money is not static. Value
of money always changes, therefore, correct
measurement is not possible.
 Kinds of Utility
Utility are of three kinds:
(i) Marginal Utility,
(ii) Total Utility,
(iii) Average Utility
 Marginal Utility
Marginal utility is the utility derived from the last or
marginal unit of consumption. It refers to the additional
utility derived from an extra unit of the given commodity
purchased, acquired or consumed by the consumer.
It is the net addition to total utility made by the utility of
the additional or extra units of the commodity in its total
stock. It has been said—as the last unit in the given total
stock of a commodity.
According to Prof. Boulding—”The marginal utility of any
quantity of a commodity is the increase in total utility
which results from a unit increase in its consumption.”
 Example of Marginal Utility
Suppose Mr. Shanker is consuming bread and he
takes five breads. By taking first unit he derives
utility up to 20; second unit 16; third unit 12;
fourth unit 8 and from fifth 2. In this example
the marginal unit is fifth bread and the marginal
utility derived is 2. If we will consume only four
bread then the marginal unit will be fourth
bread and utility will be 8.
Kinds of Marginal Utility—Marginal utility is of three kinds:
(i) Positive Marginal Utility,
(ii) Zero Marginal Utility,
(iii) Negative Marginal Utility.
It is a matter of general experience that if a man is
consuming a particular goods, then receiving of next unit of
goods reduces the utilities of the goods and ultimately a
situation comes when the utility given by the goods become
zero and if the use of the goods still continues, then the next
unit will give dis-utility. In other words it can be said that we
will derive “negative utility”.
This can be studied better by the following
table:
 Total Utility
Total Utility is the utility from all units of
consumption. According to Mayers—”Total Utility
is the sum of the marginal utilities associated
with the consumption of the successive units.”
For example:
Suppose, a man consumes five breads at a time.
He derives from first bread 20 units of satisfaction
from 16, from third 12, from fourth 8 and from
fifth 4 i.e., total 60 units.
 Average Utility
Average Utility is that utility in which the total
unit of consumption of goods is divided by
number of Total Units. The Quotient is known as
Average Utility.
For example—If the Total Utility of 4 bread is 40,
then the average utility of 3 bread will be 12 if
the Total Utility of 3 bread is 36 i.e., (36 ÷ 3 =
12).
 Relation between Total Utility and
Marginal Utility
There is a close relationship between Total Utility and Marginal Utility.
As there is increase in the unit of a particular commodity, the Marginal
Utility goes on diminishing and Total Utility goes on increasing. Total
Utility goes on increasing up to that extent till the Marginal Utility
becomes Zero. When Marginal Utility is zero Total Utility is maximum.
After Zero Marginal Utility comes to negative and the result is that
Total Utility starts reducing relationship between Total Utility and
Marginal Utility can be started as follows:
(i) When Marginal Utility is reducing, the Total Utility will increase so
long Marginal Utility does not become zero.
(ii) When Marginal Utility becomes zero; Total Utility will be maximum.
(iii) After zero when Marginal Utility is negative then there is reduction
in Total Utility.
 Measurement of Utility
Measurement of a utility helps in analyzing the
demand behaviour of a customer. It is measured
in two ways
 Cardinal Approach
In this approach, one believes that it is measurable. One can
express his or her satisfaction in cardinal numbers i.e., the
quantitative numbers such as 1, 2, 3, and so on. It tells the
preference of a customer in cardinal measurement. It is measured
in a utility.
Limitation of Cardinal Approach
 In the real world, one cannot always measure utility.
 One cannot add different types of satisfaction from different
goods.
 For measuring it, it is assumed that utility of consumption of
one good is independent of that of another.
 It does not analyze the effect of a change in the price.
 Ordinal Approach
In this approach, one believes that it is comparable. One can
express his or her satisfaction in ranking. One can compare
commodities and give them certain ranks like first, second,
tenth, etc. It shows the order of preference. An ordinal
approach is a qualitative approach to measuring a utility.
Limitation of Ordinal Approach
• It assumes that there are only two goods or two baskets of
goods. It is not always true.
• Assigning a numerical value to a concept of utility is not easy.
• The consumer’s choice is expected to be either transitive or
consistent. It is always not possible.
Law of Diminishing Marginal Utility
The law of diminishing marginal utility is an
important concept to understand. It basically falls in
the category of Microeconomics, but it is of equal
and significant importance in our day-to-day
decisions. In this article, you will find the definition
of the law of diminishing marginal utility, its detailed
explanation with the help of a schedule and diagram,
assumptions we make in the law of diminishing
marginal utility and the exceptions where the law of
diminishing marginal utility does not apply.
 Continue….
The law of diminishing marginal utility is
comprehensively explained by Alfred Marshall.
According to his definition of the law of diminishing
marginal utility, the following happens:
“During the course of consumption, as more and
more units of a commodity are used, every
successive unit gives utility with a diminishing
rate, provided other things remaining the same;
although, the total utility increases.”
 Example….
In economics, the law of diminishing marginal utility
states that the marginal utility of a good or service
declines as more of it is consumed by an individual.
Economic actors receive less and less satisfaction from
consuming incremental amounts of a good.
Food is a common example of a good with diminishing
marginal utility. Think of an apple, for example. If
you're starving, an apple offers pretty high value. But
the more apples you eat, the less hungry you become
— Making each additional apple less valuable.
We can briefly explain Marshall’s theory with the help of an
example. Assume that a consumer consumes 6 apples one after
another. The first apple gives him 20 utils (units for measuring
utility). When he consumes the second and third apple, the
marginal utility of each additional apple will be lesser. This is
because with an increase in the consumption of apples, his
desire to consume more apples falls.
Therefore, this example proves the point that every successive
unit of a commodity used gives the utility with the diminishing
rate.
We can explain this more clearly with the help of a schedule
and diagram.
Schedule for Law of Diminishing Marginal
Utility:
 Continue…..
In the above table, the total utility obtained
from the first apple is 20 utils, which keep on
increasing until we reach our saturation point at
5th apple. On the other hand, marginal utility
keeps on diminishing with every additional apple
consumed. When we consumed the 6th apple,
we have gone over the limit. Hence, the
marginal utility is negative and the total utility
falls.
With the help of the schedule, we have made
the following diagram:
Saturation Point: The point where the desire to
consume the same product anymore becomes
zero.
 Disutility:
If you still consume the product after the saturation point, the
total utility starts to fall. This is known as disutility.
When the first apple is consumed, the marginal utility is 20.
When the second apple is consumed, the marginal utility
increases by 15 utils, which is less than the marginal utility of the
1st apple – because of the diminishing rate. Therefore, we have
shown that the utility of apples consumed diminishes with every
increase of apple consumed.
Similarly, when we consumed the 5th apple, we are at our
saturation point. If we consume another apple, i.e. 6th apple, we
can see that the marginal utility curve has fallen to below X-axis,
which is also known as ‘disutility’.
 Utility
 Types of Utility
 Diminishing Marginal Utility

Supply vs. Stock

Law of Supply with its Limitations
Supply schedule and Supply Curve