The Concept of Utility: It’s Meaning, Total Utility and Marginal Utility !
Although the concept of ‘taste’ and ‘satisfaction’ are familiar for all of us, it is much more difficult to express these concepts in concrete terms. For example, suppose you have just eaten an ice-cream and a chocolate.
Can you tell how much are you satisfied from each of these items? Probably you can tell which item you liked more. But, it is very difficult to express “how much” you liked one over the other. It is evident, that we need a more quantitative measure of satisfaction. Due to this reason, economists developed the concept of utility.
Meaning of Utility:
Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or expected, derived from the consumption of a commodity. Utility differs from person- to-person, place-to-place and time-to-time. In the words of Prof. Hobson, “Utility is the ability of a good to satisfy a want”.
In short, when a commodity is capable of satisfying human wants, we can conclude that the commodity has utility.
How to Measure Utility?
After understanding the meaning of utility, the next big question is: How to measure utility? According to classical economists, utility can be measured, in the same way, as weight or height is measured. For this, economists assumed that utility can be measured in cardinal (numerical) terms. By using cardinal measure of utility, it is possible to numerically estimate utility, which a person derives from consumption of goods and services. But, there was no standard unit for measuring utility. So, the economists derived an imaginary measure, known as ‘Util’.
Utils are imaginary and psychological units which are used to measure satisfaction (utility) obtained from consumption of a certain quantity of a commodity.
Example – Measurement of satisfaction in utils:
Suppose you have just eaten an ice-cream and a chocolate. You agree to assign 20 utils as utility derived from the ice-cream. Now the question is: how many utils be assigned to the chocolate? If you liked the chocolate less, then you may assign utils less than 20.
However, if you liked it more, you would give it a number greater than 20. Suppose, you assign 10 utils to the chocolate, then it can be concluded that you liked the ice-cream twice as much as you liked the chocolate.
One more way to measure utility:
Utils cannot be taken as a standard unit for measurement as it will vary from individual to individual. Hence, several economists including Marshall, suggested the measurement of utility in monetary terms. It means, utility can be measured in terms of money or price, which the consumer is willing to pay.
In the above example, suppose 1 util is assumed to be equal to Rs. 1. Now, an ice-cream will yield utility worth Rs. 20 (as 1 util = Rs. 1) and chocolate will give utility of Rs. 10. This utility of Rs. 20 from the ice-cream or f I0 from the chocolate is termed as value of utility in terms of money.
The advantage of using monetary values instead of utils is that it allows easy comparison between utility and price paid, since both are in the same units.
It must be noted that it is impossible to measure satisfaction of a person as it is inherent to the individual and differs greatly from person-to-person. Still, the concept of utility is very useful in explaining and understanding the behaviour of consumer.
Total Utility (TU):
Total utility refers to the total satisfaction obtained from the consumption of all possible units of a commodity. It measures the total satisfaction obtained from consumption of all the units of that good. For example, if the 1st ice-cream gives you a satisfaction of 20 utils and 2nd one gives 16 utils, then TU from 2 ice-creams is 20 + 16 = 36 utils. If the 3rd ice-cream generates satisfaction of 10 utils, then TU from 3 ice-creams will be 20+ 16 + 10 = 46 utils.
TU can be calculated as:
TUn = U1 + U2 + U3 +……………………. + Un
TUn = Total utility from n units of a given commodity
U1, U2, U3,……………. Un = Utility from the 1st, 2nd, 3rd nth unit
n = Number of units consumed
Marginal Utility (MU):
Marginal utility is the additional utility derived from the consumption of one more unit of the given commodity. It is the utility derived from the last unit of a commodity purchased. As per given example, when 3rd ice-cream is consumed, TU increases from 36 utils to 46 utils. The additional 10 utils from the 3rd ice-cream is the MU.
In the words of Chapman, “Marginal utility is addition made to total utility by consuming one more unit of a commodity”.
MU can be calculated as: MUn = TUn – TUn-1
Where: MUn = Marginal utility from nth unit; TUn = Total utility from n units;
TUn-1 = Total utility from n – 1 units; n = Number of units of consumption
MU of 3rd ice-cream will be: MU3 = TU3 – TU2 = 46 – 36 = 10 utils One More way to Calculate MU
MU is the change in TU when one more unit is consumed. However, when change in units consumed is more than one, then MU can also be calculated as:
MU = Change in Total Utility/ Change in number of units = ∆TU/∆Q
Total Utility is Summation of Marginal Utilities:
Total utility can also be calculated as the sum of marginal utilities from all units, i.e.
TUn= MU1 + MU2 + MU3 +……………………… + MUn or simply,
TU = ∑MU
The concepts of TU and MU can be better understood from the following schedule and diagram:
Table 2.1: TU and MU
|Ice-creams Consumed||Marginal Utility (MU)||Total Utility (TU)|
In Fig. 2.1, units of ice-cream, are shown along the X-axis and TU and MU are measured along the Y-axis. MU is positive and TU is increasing till the 4th ice-cream. After consuming the 5th ice-cream, MU is zero and TU is maximum.
This point is known as the point of satiety or the stage of maximum satisfaction. After consuming the 6th ice-cream, MU is negative (known as disutility) and total utility starts diminishing. Disutility is the opposite of utility. It refers to loss of satisfaction due to consumption of too much of a thing.