3. The Conceptof Utility: It’s Meaning, Total Utility and MarginalUtility!
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.
4. 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.
5. 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.
TotalUtility (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 canbe calculatedas:
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
MarginalUtility (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
6. 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
TotalUtility is Summation of MarginalUtilities:
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 Total Utility (TUx) Marginal Utility (MUx)
1 20 20
2 36 16
3 46 10
4 50 4
5 50 0
6 44 -6
The first column is showing the unit of a commodity. Second column of the above table
gives and individuals hypothetical total utility (tu) from consuming various alternative
quantities of commodity X . There it is noted that, as the individual consumes more unit
of X, Tux increases.
The Third column of the table is showing the individuals marginal Utility for commodity
X. each value of column three is obtain by subtracting two successive value of column
two. For example, If the individuals consumption of X goes from 1 unit to 2 units, the
(tux ) goes from 20 to 36 utilities, giving a MUx of 16. Similarly if the consumption of X
rises from 2 units to 3 units, the (Tux) rises from 36 to 46, giving a MUx from 16 to 10.
From the table we can see that as this individuals consumption more Units of X, MUx
falls.
7. TotalUtility and Marginal Utility curve
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.
Basic Assumptions of MarginalUtility Analysis
We shall first mention a few basic assumptions on which the marginal utility analysis is based.
We shall see later how the marginal utility analysis has been criticized on the ground that the
assumptions on which it is based are unrealistic or invalid. The following are the main
assumptions:—
(i) Cardinal Measurement of Utility: Marginal utility analysis assumes in the first place that
utility can be measured and the exact measurement can be given by assigning definite numbers
such as 1, 2, 3, etc. That is, it is assumed that utility is a quantifiable entity. This means that a
person can express the satisfaction derived from the consumption of a commodity in quantitative
terms. He can say, for instance, that for him the first unit of the commodity has utility equal to
10, the second unit 8, and so on. In this way, it is possible for a consumer to compare the utilities
8. of different goods. If for example, fruit has for him utility 20 and sweets 10, then he can say, that
for him the utility of fruits is double that of sweets. Utility is usually measured in imaginary
units.
(ii) Utilities are Independent: Marginal utility analysis assumes that the utilities of different
commodities are independent of one another. That is, the utility of one commodity does not in any way
affect that of another. In other words, the satisfaction desired from the consumption of one good is the
function of that good alone and is not affected by the consumption of another. It depends on the
quantityconsumedof one goodandnot of another.
(iii) Constant Marginal Utility of Money: Another important assumption of the marginal utility
analysis is that the marginal utility of money remains constant even though the quantity of money with
the consumer is diminished by the successive purchases made by him. It is assumed that while marginal
utility of a commodity varies with the quantity of the commodity purchased, the marginal utility of
money remains throughout the same as the quantity of the good purchased varies. This assumption
becomes necessary because the marginal utility of a commodity is measured in terms of money. It is
considereddesirablethatthe measure itself shouldnotkeepchanging.
(iv) Introspection: The Marginal Utility analysis also assumes that from one’s own experience
(judging what happens in one’s own mind), it is possible to draw inference about person. This is self-
observation applied to another person. It is assumed that the mind of men work identically in similar
situations. This is how system of taxation is built on the assumption that the same incomes mean the
same thingto all personsirrespective of dissimilarcircumstance.
Law of Diminishing Marginal Utility
“As the quantity consumed of a commodity goes on increasing, the utility derived from each
successive unit goes on diminishing, consumption of all other commodities remaining the same”
Whenthe changesin consumptionare infinitelysmall,marginalutilityisthe derivativeof total utility.
MU = dTU/dX
Law of Diminishing MarginalUtility
