Concept Of Utility In Economics - EconomicSea

The utility is a part of the theory of consumer behavior. Before we start exploring Utility, we need to know that consumer behavior deals with how the consumer allocated his/her income on different commodities.

What is Utility?

In economic terms, the utility refers to satisfaction to consumers after consumption of goods and services. The more they need for the commodity, the greater is the utility derived from the commodity. “Utility” is one of the important indicators to analyze consumer behavior.

•             Utility is subjective, it is based on personal feelings, tastes, and preferences.

•             Different consumers have different levels of utility for the same commodity.

Cardinal Utility Analysis

When utility is expressed on numbers then it is called Cardinal Utility Analysis. And it is the oldest theory of demand. According to cardinal utility, it assumes that utility can be measured. For example, that one chapati gives me 40 units of utility.

Measures Of Utility

1.            Total Utility: It refers to the sum of the utility or satisfaction derived from consuming all units of a particular commodity. For example: if a person consumes Chapati and will get 40 utils of total utility. The first chapati yield 17 utils, from the second yield 14 utils, and from the third chapati yield 9 utils. So, the total utility would be 40 utils.

2.            Marginal Utility: Marginal utility is the change in the total utility from the consumption of one additional unit of the commodity. Suppose a person increases the consumption of chapatis from one chapati to two chapatis, the total utility increases from 17 utils to 31 utils, So, the marginal utility is 14 here of the 2nd chapati consumed.

A table showing the values of total and marginal utility derived from the consumption of different quantities of goods are given.

UNITS	TOTAL UTILITY	MARGINAL UTILITY
1	17	17
2	31	14
3	40	9

The above table shows that when a person consumes no chapati, she gets no satisfaction. Her total utility in case of no chapati is zero, but when she consumes one chapati, she gets 17 units of satisfaction. So, her total utility is 17 and her marginal utility is also 17. As she consumes the second chapati, she gains additional 14 units (MU). Thus, the total utility is 31. Thus, her marginal utility has gone down 17 to 14 utils because now she has less craving for the second chapati. And same in the case of the third chapati, her marginal utility has fallen to 9 utils.            

Ordinal Utility Analysis

In real life, we never express utility in terms of numbers. The ordinal utility approach states that utility cannot be measured, instead consumers can rank different goods. Therefore, it would be possible for the consumer to tell subjectively whether a good derive more or less satisfaction than other goods. Consumer preferences over the set of available bundles often are represented diagrammatically.

This is an Indifference Curve ( will discuss in detail in some other blog), it is a graph which represents two goods that gives consumer equal satisfaction. A, B and C points on the curve show the combination of X and Y goods.