Utility in Economics

What is Utility?

The level of satisfaction derived by a consumer after consuming a good or service is called utility.

In economics, utility can be defined as a measure of consumer satisfaction received on the consumption of a good or service.

The concept of utility is used in neo classical Economics to explain the operation of the law of demand.

A consumer is willing to buy a particular good to satisfy his/her various needs and wants. Thus, it can be said that the demand for a good is closely related to the level of satisfaction that the consumer derives from that good.

For instance, if the level of consumer satisfaction after the consumption of a good is high, the demand for that good rises and vice versa.

Utility Definition

Utility is the power of commodity to satisfy human wants.Prof. Waugh
On the whole in recent years the wider definition is preferred and utility is identified, with desireness rather than with satisfyingness.Fraser

Meaning of Utility

The utility is want satisfying power of a good or service. It is also defined as the property of a good or service to satisfy the want of the consumer. The utility is subjective.

It depends upon the mental assessment of the consumer and is determined by several factors which influence the consumer’s judgment.

Formula for Utility

Mathematically, utility can be expressed as a function of the quantities of different commodities consumed by an individual.

If an individual consumes quantity m1 of a commodity M, quantity n1 of a commodity N, and quantity r1 of a commodity R, the utility U of the consumer can be measured as follows:

U = f (m1, n1, r1)

Utility Analysis

Utility analysis is a systematic process of measuring utility derived by a consumer after the consumption of a good. It involves analysing factors that influence consumer behaviour for a particular good.

There are two approaches to the measurement of utility, namely cardinal utility approach and ordinal utility approach.

Characteristics of Utility

1. Utility is that invisible quality of anything which resorts to satisfying any human want. The utility may neither be seen, i.e. it is invisible, nor may it be touched. It is there in the things in abstract or invisible form.

2. Utility is not concerned with the ‘morality’. Whether the consumption of a thing is useful or harmful, if it serves to fulfill the wants of anyone, it possesses ‘utility’.

3. Utility emerges out of the human needs or wants. Thus it is Individual and relative in nature. It is a subjective concept, not objective or concrete which could be uniformly applicable in all cases.

Types of Utility

There are four different types of utility. Those are:

• Form utility
• Place utility
• Time utility
• Possession utility

Concept of Utility

Total Utility

Definition: Total utility is defined as the sum of the utility derived by a consumer from the different units of a commodity or service consumed at a given period of time.

Assume that an individual consumes five units of a commodity X at a given period of time and derives utility out of the consumption of each unit as u1, u2, u3, u4, and u5.

The total utility is measured as follows:

TU = U1 + U2 + U3 + U4 + U5

If the individual consumes n number of commodities, his/her total utility, TUn, will be the sum of the utility derived from each commodity. For example, an individual consumes commodities X, Y, and Z and their respective utilities are Ux, Uy, and Uz, then total utility is expressed as follows:

TUn = Ux + Uy + Uz

Marginal Utility

Definition: Marginal utility is defined as the utility derived from the marginal or additional unit of a commodity consumed by an individual.

It can also be defined as the addition to the total utility of a commodity resulting from the consumption of an additional unit.

Therefore, marginal utility, MU of a commodity X, is the change in the total utility, ∆ TU, attained from the consumption of an additional unit of commodity X.

Mathematically, it can be expressed as:

MUx = ∆ TUx / ∆ Qx

Where TUx = Total utility, ∆Qx = Change in quantity consumed by one additional unit

When total number of unit consumed is n, a marginal utility can also be expressed as: MU of nth unit = TUn – TUn – 1

Reference
1. D N Dwivedi, Managerial Economics, 8th ed, Vikas Publishing House

2. Petersen, Lewis & Jain, Managerial Economics, 4e, Pearson Education India

3. Brigham, & Pappas, (1972). Managerial economics, 13ed. Hinsdale, Ill.: Dryden Press.

4. Dean, J. (1951). Managerial economics (1st ed.). New York: Prentice-Hall.

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