Meaning and Concept of Utility

Utility Definition – It is a measure of satisfaction an individual gets from the consumption of the commodities. In other words, it is a measurement of usefulness that a consumer obtains from any good. A utility is a measure of how much one enjoys a movie, favourite food, or other goods. It varies with the amount of desire.

Suggested Videos

 

Utility Definition

Suppose you went to a restaurant and ordered your favourite 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 favourite 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, favourite food, or other goods. It varies with the amount of desire. One can conclude the following conclusions

• A Utility of a good differs from one consumer to another.
• It keeps on changing for the same consumer due to change in the amount of desires.
• It should not be equated with its usefulness.

Characteristic of Utility

• It is dependent upon human wants.
• It is immeasurable.
• A utility is subjective.
• It depends on knowledge.
• Utility depends upon use.
• It is subjective.
• It depends on ownership.

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 utils.

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.

Types of Utility

It is basically of three types

Total

The sum of the total satisfaction from the consumption of specific goods or services. It increases as more goods are consumed.

Total Utility (T.U.) = U₁ + U₂ + … + U_n

Marginal

It is the additional satisfaction gained from each extra unit of consumption. It decreases with each additional increase in the consumption of a good.

Marginal Utility (M.U.) = Change in T.U. / Change in Total Quantity = Δ TU/ Δ Q

Average

One can obtain it by dividing the total unit of consumption by the number of total units. Suppose there are total n units, then

Average Utility (A.U.) = T.U. / Number of units = T.U. / n

Types of Economic Utility

• Form: It refers to the specific product or service that a company offers.
• Place: It refers to the convenience and readiness of the services available at a place to the customer
• Time: It refers to the ease of availability of products or services at the time when a customer needs.
• Possession: It refers to the benefit a customer derives from the ownership of a company’s product.

Solved Example for You

Problem: Which type of utility is in the situation when a carpenter is making a table?

1. Place
2. Form
3. Time
4. None of these

Solution: b. Form.