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”.
Utility
Utility is defined as the capacity or power of a
commodity to satisfy a human want.
If a commodity does not satisfy a human want,
then then we say that it has no utility.
Total utility is the sum of the utilities obtained
from consuming all the units of a commodity.
Marginal utility is the utility of additional unit.
• 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.
• 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”.
Law of diminishing marginal utility
• If a consumer takes more and more units of a
commodity, the additional utility he derives
from an extra unit of the commodity goes on
falling. Thus, according to this law, the
marginal utility decreases with the increase in
the consumption of a commodity. When
marginal utility decreases, the total utility
increases at a diminishing rate.
•
• Suppose Mr X is hungry and eats apple one by one. The
first apple gives him great pleasure (higher utility) as
he is hungry; when he takes the second apple, the
extent of his hunger will reduce. Therefore he will
derive less utility from the second apple. If he
continues to take additional apples, the utility derived
from the third apple will be less than that of the
second one. In this way, the additional utility (marginal
utility) from the extra units will go on decreasing. If the
consumer continues to take more apples, marginal
utility falls to zero and then becomes negative.
Assumptions
• 1. The units of consumption must be in standard units e.g., a cup
of tea, a bottle of cool drink etc.
• 2. All the units of the commodity must be identical in all aspects
like taste, quality, colour and size.
• 3. The law holds good only when the process of consumption
continues without any time gap.
• 4. The consumer's taste, habit or preference must remain the same
during the process of consumption.
• 5. The income of the consumer remains constant.
• 6. The prices of the commodity consumed and its substitutes are
constant.
• 7. The consumer is assumed to be a rational economic man. As a
rational consumer, he wants to maximize the total utility.
• 8. Utility is measurable.
Practical importance of the law
• Helpful in taxation
• Basis of the policy of equal disribution of
wealth
• Helpful in regulating daily expenditure
• Determination of market price
• Helpful to the monopolist
• Basis of economic laws
