utility analysis

UTILITY ANALYSIS

UTILITY ANALYSIS

The simple meaning of ‘utility’ is ‘usefulness’. In economics utility is the capacity of a commodity to satisfy human wants.

Utility is the quality in goods to satisfy human wants. Thus, it is said that “Wants satisfying capacity of goods or services is called Utility.”

ACCORDING TO PROF. WAUGH

“Utility is the power of commodity to satisfy human wants.”

ACCORDING TO FRASER

“On the whole in recent years the wider definition is preferred and utility is identified, with desireness rather than with satisfyingness.”

ACCORDING TO MRS. ROBINSON

“Utility is the quality of commodities that makes individuals want to buy them.”

ACCORDING TO HIBDON

“Utility is the quality of a good to satisfy a want.”

ACCORDING TO JEVONS

“Utility refers to abstract quality whereby an object serves our purpose.”

FEATURES OF UTILITY ANALYSIS

THE UTILITY IS SUBJECTIVE

The utility is subjective because it deals with the mental satisfaction of a man. A commodity may have different utility for different persons. Cigarette has utility for a smoker but for a person who does not smoke, the cigarette has no utility. Utility, therefore, is subjective.

THE UTILITY IS RELATIVE

Utility is highly relative and variable. It varies from person to person and from time to time or place to place for the same individual. Again, a same commodity can give different utility to different people. Because, utility a person derives from either good or service depends not only on his psychological attitude but also on his intensity of desire.

UTILITY AND USEFULNESS

A commodity having utility need not be useful. Cigarette and liquor are harmful to health, but if they satisfy the want of an addict then they have utility for him.

UTILITY AND MORALITY

The utility is independent of morality. Use of liquor or opium may not be proper from the moral point of views. But as these intoxicants satisfy wants of the drunkards and opium eaters, they have utility for them.

UTILITY IS UNMEASURABLE

Although Prof. Marshall claimed that utility can be cardinally measured in terms of money or price in his marginal utility analysis theory. However, according to Hicks, Allen and Slutsky, utility cannot be measured in terms of number. It can only be ranked or ordered in terms of preference pattern.

UTILITY IS ABSTRACT

It is abstract in a sense as it cannot be seen or touched or felt. For example, teaching of a teacher, advice of a lawyer can neither be seen nor touched. Hence, utility is abstract.

UTILITY AND PLEASURE

It is not necessary that a commodity possessing utility also gives pleasure whenever it is consumed. An injection possesses utility to an individual. However, it gives him/her physical pain. Hence, utility and pleasure are unrelated.

MULTI PURPOSE

If a commodity is capable of satisfying several wants, it is said to have multi- purpose utility. Example: electricity supplied at our house can be used for various purposes such as charging mobiles, use of televisions, using fans etc. Thus having multi-purpose utility.

DEPENDS ON INTENSITY OF WANTS

Utility of a commodity is directly proportional to the intensity or urgency of the want. The more intense or urgent the event, the more utility the commodity has. Example: disaster management teams have more utility at the same time of disasters, and have less utility during normal times.

ASSUMPTIONS OF UTILITY ANALYSIS

  • The utility analysis is based on the cardinal concept which assumes that utility is measurable and additive like weights and lengths of goods.
  • Cardinal or Utility is measurable in terms of money.
  • The marginal utility of money is assumed to be constant
  • The consumer is rational who measures, calculates, chooses and compares the utilities of different units of the various commodities and aims at the maximization of utility.
  • He has full knowledge of the availability of commodities and their technical qualities.
  • He possesses perfect knowledge of the choice of commodities open to him and his choices are certain.
  • They know the exact prices of various commodities and their utilities are not influencing by variations in their prices.
  • There are no substitutes.

KINDS OF UTILITY

Various types of utility is as follows:

INITIAL UTILITY

The utility derived from the first unit of a commodity calls initial utility. Utility derived from the first piece of bread calls initial utility. Thus, the initial utility is the utility obtained from the consumption of the first unit of a commodity. It is always positive.

TOTAL UTILITY

Total Utility is the utility from all units of consumption.

ACCORDING TO MYERS

“Total Utility is the sum of the marginal utilities associated with the consumption of the successive units.”

ACCORDING TO LEFTWITCH

“Total utility refers to the entire amount of satisfaction obtained from consuming various quantities of a commodity.”

Accordingly, the total utility can calculate as:

TU = MU1 + MU2 + MU3 +……….+ MUn

For example: Suppose, a man consumes five breads at a time. He derives from first bread 20 units of satisfaction from 16, from third 12, from fourth 8 and from fifth 4 i.e., total 60 units.

This can be shown by the following table:

UTILITY ANALYSIS
UTILITY ANALYSIS

The Total utility curve is as follows:

UTILITY ANALYSIS
UTILITY ANALYSIS

MARGINAL UTILITY

Marginal utility is the utility derived from the last or marginal unit of consumption. It refers to the additional utility derived from an extra unit of the given commodity purchased, acquired or consumed or demanded by the consumer.

It is the net addition to total utility made by the utility of the additional or extra units of the commodity in its total stock.

ACCORDING TO PROF. BOULDING

“The marginal utility of any quantity of a commodity is the increase in total utility which results from a unit increase in its consumption.”

ACCORDING TO CHAPMAN

“Marginal utility is the addition made to total utility by consuming one more unit of commodity.”

It can be calculated as follows:

MUnth = TUn – TUn-1

Here

MUnth = Marginal utility of nth unit.

TUn = Total utility of “n” units, and.

TUn-1 = Total utility of n-1 units.

For example

Suppose Mr. Shanker is consuming bread and he takes five breads. By taking first unit he derives utility up to 20; second unit 16; third unit 12; fourth unit 8 and from fifth 2. In this example the marginal unit is fifth bread and the marginal utility derived is 2. If we will consume only four bread then the marginal unit will be fourth bread and utility will be 8.

Kinds of Marginal Utility—Marginal utility is of three kinds:

(i) Positive Marginal Utility,

(ii) Zero Marginal Utility,

(iii) Negative Marginal Utility.

It is a matter of general experience that if a man is consuming a particular goods, then receiving of next unit of goods reduces the utilities of the goods and ultimately a situation comes when the utility given by the goods become zero and if the use of the goods still continues, then the next unit will give dis-utility. In other words it can be said that we will derive “negative utility”.

This can be studied better by the following table:

UTILITY ANALYSIS
UTILITY ANALYSIS

UTILITY ANALYSIS
UTILITY ANALYSIS

From the table given above it is clear that up to the consumption of the fifth bread we receive positive utility; 6th unit is the unit of full satisfaction i.e., Utility derive from that unit is zero. From 7th unit the utility received will be negative utility. The table can be represented in shape of diagram as follows: In diagram: OX axis (line) shows unit of bread and OY line shows the Marginal Utility received. From the figure it is clear that from the first unit of bread utility received are 20.

Similarly 2, 3, 4, 5 Unit of bread’s utility is 16, 12, 8, 4 respectively All these have been shown on OX line which shows positive marginal utility. Utility of the sixth bread is zero and that of the seventh bread is negative and negative rectangle has been shown below OX line.

Positive Utility:  If by consuming one extra unit of commodity, the total utility increases, then marginal utility is positive.

Zero Utility: When the consumption of a unit of a commodity makes no addition to the total utility, then it is the point of Zero Utility. In table the total utility, after the 6th unit is consumed. This is the point of Zero Utility. It is thus seen that the total utility is maximum when the Marginal Utility is zero.

Negative Utility: Negative Utility is that utility where if the consumption of a commodity is carried to excess, then instead of giving any satisfaction, it may cause dis-satisfaction. The utility is such cases is negative. In the table given above the marginal utility of the 7th unit is negative.

RELATION BETWEEN TOTAL UTILITY AND MARGINAL UTILITY:

There is a close relationship between Total Utility and Marginal Utility. As there is increase in the unit of a particular commodity, the Marginal Utility goes on diminishing and Total Utility goes on increasing. Total Utility goes on increasing up to that extent till the Marginal Utility becomes Zero. When Marginal Utility is zero Total Utility is maximum.

After Zero Marginal Utility comes to negative and the result is that Total Utility starts reducing. Relationship between Total Utility and Marginal Utility can be started as follows:

(i) When Marginal Utility is reducing, the Total Utility will increase so long Marginal Utility does not become zero.

(ii) When Marginal Utility becomes zero; Total Utility will be maximum.

(iii) After zero when Marginal Utility is negative then there is reduction in Total Utility.

Quantity Total Utility Marginal Utility
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

With the help of above schedule the relationship between TU and MU is explained as:

  1. In the above schedule MU decreases and TU increases at a decreasing rate upto 5th unit of commodity.
  2. MU becomes zero at 6th unit and TU = 30 become maximum.
  3. When MC becomes negative, the TU declines from 30 to 28 units at 7th units of a commodity.

With the help of the above schedule the relationship between MU and TU can be represented in the diagram.

UTILITY ANALYSIS
UTILITY ANALYSIS
  1. In figure 2, MU curve moves downward having negative slope while in figure 1 TU curve, having negative positive slope moves upward but tendency to move is towards x-axis, which shows decreasing rate.
  2. A point F´ in figure (2) MU curve cuts the s-axis at the 6th unit and TU curve has its maximum point F which is saturation point.
  3. At 7th unit MU curve is below x-axis as in figure (2) and TU curve declines from point ‘F’ to ‘G’ as in figure (1).

HIGHLIGHTS

(1) Marginal Utility goes on diminishing with the consumption of every additional unit.

(2) Total Utility goes on increasing with the consumption of every additional unit but at a diminishing rate.

(3) Marginal Utility is equal to the increase in the Total Utility. Total Utility is the sum total of the Marginal Utilities derived from all the units consumed.

(4) When Marginal Utility becomes 0, total utility does not increase.

(5) When Marginal Utility becomes negative, Total Utility decreases.

(6) Increase in Total Utility depends on Marginal Utility.

(7) Since Marginal Utility diminishes, Total Utility increases at a diminishing rate.

(8) When Marginal Utility is Zero, Total Utility is maximum.

(9) When Marginal Utility is negative, Total Utility declines.

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UTILITY ANALYSIS
UTILITY ANALYSIS

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