When we consume a good or service, it provides us with satisfaction or happiness. However, it is difficult to express this satisfaction in quantitative terms. Therefore, economists developed the concept of utility, which refers to the want-satisfying power of a commodity. In other words, it is the satisfaction, actual or expected, derived from the consumption of a commodity. In this article, we will discuss the meaning of utility, how to measure utility, and the concepts of total utility and marginal utility.
Meaning of Utility
Utility refers to the satisfaction obtained from the consumption of a commodity. It is important to note that utility differs from person to person, place to place, and time to time. The utility of a good is its ability to satisfy a want. Therefore, when a commodity is capable of satisfying human wants, we can conclude that the commodity has utility.
How to Measure Utility?
Classical economists assumed that utility can be measured in the same way as weight or height is measured. They assumed that utility can be measured in cardinal (numerical) terms. By using cardinal measure of utility, it is possible to numerically estimate the utility that a person derives from the consumption of goods and services. However, there was no standard unit for measuring utility. Therefore, economists derived an imaginary measure, known as ‘Util’.
One more way to measure utility is to measure it in monetary terms. Utility can be measured in terms of money or price, which the consumer is willing to pay. 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.
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 the consumption of all the units of that good. For example, if the first ice-cream gives you a satisfaction of 20 utils and the second one gives 16 utils, then the TU from two ice-creams is 20 + 16 = 36 utils. If the third ice-cream generates a satisfaction of 10 utils, then TU from three 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 a commodity. It is the utility derived from the last unit of a commodity purchased. When the third ice-cream is consumed, TU increases from 36 utils to 46 utils. The additional 10 utils from the third ice-cream is the MU.
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.
In conclusion, utility refers to the satisfaction derived from the consumption of a commodity. It is difficult to measure utility, but economists have developed methods to do so, including the use of imaginary units known as utils and measuring it in monetary terms. The concepts of total utility and marginal utility are important in understanding the behaviour of consumers. Total utility measures the total satisfaction obtained from consuming all units of a good, while marginal utility measures the additional satisfaction obtained from consuming one more unit