UTILITY

The wants satisfying power of goods or services is called Utility. It is the satisfaction, actual or expected,

derived from the consumption of a commodity. Utility differs from a person- to-person, place-to-place, and

time-to-time. In short, when a commodity is capable of satisfying human wants, we can conclude that the

commodity has utility.

HOW UTILITY MEASURED?

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

a 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 a plate of momo and a noodle. You agree to assign 20 utils as utility derived

from the Momo. Now the question is: how many utils be assigned to the noodle? If you liked the Noodle

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 noodle, then it can be concluded that you liked the momo twice as much as you liked the noodle.

1) 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

Where:

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 an 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:

ATU

MU = Change in Total Utility/ Change in number of units = TU/Q

Average Utility (A.U):

Average utility is obtained by dividing the total utility by number of commodities consumed. In other

words, average utility is the per unit utility. Mathematically, it is expressed as follows:

A.Ux = T.Ux / Qx
Where,

A.Ux = average utility of x commodity

T.Ux = total utility of x commodity

Qx = quantity of x commodity

Table 3.1

Ice Cream Consumed Marginal Utility Total Utility

1 20 20

2 16 36

3 10 46

4 4 50

5 0 50

6 -6 44

Figure 3.1
In Fig. 3.1, 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 the loss of satisfaction due to consumption of too much of a thing.
 Law of Diminishing marginal Utility

Law of Diminishing Marginal Utility

The law of diminishing marginal utility was first propounded by 19th century German economist H.H.

Gossen which explains the behavior of the consumers and the basic tendency of human nature. Hence, this

law is also known as Gossens First Law. This was further modified by Marshall.

According to Marshall,

The additional benefit a person derives from a given increase of his stock of anything diminishes with the

growth of the stock that he already has.

As per the definitions, we can conclude that, if the consumer consumes goods continuously, the utility

obtained from every successive unit goes on diminishing. If the consumer is consuming the goods

continuously, firstly he reaches the point of maximum satisfaction which is known as level of satiety. If he

continues to consume the goods again, the utility obtained from that particular goods goes in negative aspect

or he gets inutility.

ASSUMPTIONS

1. The consumer who is consuming the goods should be logical and knowledgeable to consume every unit of

goods.

2. The goods which are to be consumed should be equal in size and shape.

3. Consumer should consume the goods without time gap.

4. The consumers income, preference, taste and fashion should not be changed while consuming the goods.

5. To hold the law good, utility should be measured in countable units or cardinal numbers. The utility

obtained from those goods is measured in utils unit.

6. As we know that money is the measuring rod of utility, being so, marginal utility of money should remain

constant during consumption of the goods.

Table 3.2
 UNITS OF APPLE MU

1 6

2 4

3 2

4 0

5 -2

6 -4

The table shows that when a consumer consumes 1st unit of apple he derives the marginal utility equal to

6utils. As the consumer consumes 2nd and 3rd units of apple, the marginal utility is declined from 4utils to

2utils respectively. When he consumes 4th unit of apple the marginal utility becomes zero, which is called

the point of satiety. Similarly, from the consumption of 5th and 6th units of apple, the marginal utility

becomes negative, i.e., he gets disutility instead of utility from these units of consumption. Thus, the table

shows that a consumer consumes more and more units of a commodity at a certain period of time, the

marginal utility declines, becomes zero and even negative.

Diagram 3.2
In the figure, X-axis represents units of apple and Y-axis represents utility. MU is the marginal utility curve

which slopes downward from left to right. It means that as a consumer consumes more and more units of a

commodity, the marginal utility he derives from the additional unit of consumption goes on declining,

becomes zero(at point D) and even negative(at point E and F.)

Limitations of law of diminishing marginal utility

1) Dissimilar units

This law is applicable for homogenous unit only, i.e. only if all units of a commodity consumed are similar

in length, breadth, shape and size. If there is a change in such factors, the utility obtained from it can be

increased. For example: If the 2nd apple is much larger than the 1st one, it will yield more satisfaction than

the 1st.

2) Unreasonable quantity

The quantity of the commodity a consumer consumes should be reasonable. If the units of consumption are

too small, then every successive unit of consumption may give higher utility to the consumer. For example:
If a person is given water by a spoon when he is very thirsty, each additional spoonful will give him more

satisfaction.

3) Not a suitable time period

There should not be very long gap between the consumption of different units of the commodity. If there is

time lag between the consumption of different units, then this law may not hold good. For example: If a

man have 1st apple at 10 a.m. and 2nd apple at 8 p.m. and eats nothing in between, the 2nd apple will possibly

yield even more satisfaction than the 1st apple, i.e. his marginal utility will not diminish.

4) Rare collection

This law does not apply for rare collections such as old coins, stamps and so on because the longer and

larger the number he collects, the greater will be the utility.

5) Change in taste and fashion of the consumer

The law of diminishing marginal utility will be applicable only if the consumer is not supposed to change

taste and fashion of the commodity whatever he/she was using previously.

6) Abnormal person/Rational Consumer

The law of diminishing marginal utility is applicable for normal person only. Abnormal persons such as

drunkards and druggist are not associated with the law.

Law of Equi-Marginal Utility

Law of Equi-Marginal Utility

The concept of Law of Equi-Marginal Utility was developed by H.H. Gossen in 1854 AD. So, this law is

also known as second Law of Gossen. This law was further developed and completed by A. Marshall. This

law states that In order to maximize the utility, the consumer allocates his income on various goods in

such a way that the ratio of marginal utility to the price of each good is equal to the marginal utility of

money.

Assumptions:
 The consumer should be rational.

Cardinal measurement of utility.

Applicability of Diminishing marginal utility.

The constant marginal utility of money.

As we know, every consumer has unlimited wants. However, the income this disposal at any time is limited.

The consumer is, therefore, faced with a choice among many commodities that he can and would like to

pay. He, therefore, consciously or unconsciously compress the satisfaction which he obtains from the

purchase of the commodity and the price which he pays for it. If he thinks the utility of the commodity is

greater or at-least-equal to the loss of utility of money price, he buys that commodity. As he buys more and

more of that commodity, the utility of the successive units begins to diminish. He stops further purchase of

the commodity at a point where the marginal utility of the commodity and its price are just equal. A

consumer will be in equilibrium with a single commodity symbolically: Marginal Utility of X commodity=

Price of X commodity

MUx=Px A prudent consumer in order to get the maximum satisfaction from his limited means compares

not only the utility of a particular commodity and the price but also the utility of the other commodities

which he can buy with his scarce resources. If he finds that a particular expenditure in one use is yielding

less utility than that of other, he will tie to transfer a unit of expenditure from the commodity yielding less

marginal utility. The consumer will reach his equilibrium position when it will not be possible for him to

increase the total utility by uses. The position of equilibrium will be reached when the marginal utility of

each good is in proportion to its price and the ratio of the prices of all goods is equal to the ratio of their

marginal utilities. The consumer will maximize total utility from his income when the utility from the last

rupee spent on each good is the same. Algebraically, this is:

MUa / Pa = MUb / Pb = MUc / Pc = MUn = Pn

The doctrine of equi-marginal utility can be explained by taking an example. Suppose a person has Rs.50

with him whom he wishes to spend on two commodities, coffee, and tea. The price of Coffee is Rs.10 and

Tea is Rs.5 The marginal utility derived from both these commodities is as under:

A rational consumer will spend his income 3 units of coffee and 4 units of tea, here the consumer gets equal

units of marginal utility from coffee and tea. In this combination, his total income i.e. Rs.50 is spent on

both coffee and tea. The law of equi-marginal utility can be explained with the help of diagrams.

Table 3.3

MU of Coffee MU of Tea
No. of Units

10 12
1

2 8
10

6 8
3

4 4
6

5 2
3

Diagram 3.3
 In the above diagram MUc is Marginal Utility of Coffee and MUt is Marginal Utility of Marginal Utility

of Tea. The consumer buys 3 units of coffee and 4 units of coffee and gains same amount of MU from

both commodities. Here the consumer spends his all budget i.e. Rs50 on both items, Rs30 on coffee and

Rs20 on tea. Limitations of Law of Equi-Marginal Utility:

No effect on fashions and customs.

Do not work on individual units

If there is no perfect freedom between various alternatives, then this law may not work.