UTILITY ANALYSIS

INTRODUCTION

The term ‘utility’ refers to the quality of a commodity by virtue of which it satisfy our wants. In other words, want satisfying power of a good is called utility. It measures in terms of ‘utils’ or units of utility. It is the pleasure or satisfaction (value of money) derived by a person from the consumption of a good or service or from being in a particular place and for the maximisation of which all economic action are motivated. It cannot be measured in objective terms. Utility has two main form: (i) Marginal Utility, (ii) Total utility.

Pro. Alfread Marshal in his book ‘Principles of Economics’ 1890 has given the detailed concept of utility.

In general we can describe that “Utility means total satisfaction received from consuming a good or services”. Utility is measurable in term of money.

MARGINAL UTILITY

Example:

Suppose a person get utility from the one unit of consumption is 10 utils and utility from the use of second unit of consumption is 15 utils. So, here Marginal utility for first unit is 10 units/utils and for second unit Marginal Utility is 5 units/utils.

here,

MU= TUn – TUn-1

= 15-10

=05

TOTAL UTILITY

It refers to the sum of marginal utilities obtained from the consumption of different units of commodity. Customers spent their income in a systematic way so that they can get maximum satisfaction. Thus, customers use various goods and services to meet their needs with the use of this commodities they get satisfaction and total of this satisfaction is known as Total Utility.

Customers spend every part of their income in such a way that they can get maximum satisfaction/utility. In a same way total of utility derived from the use of more than one unit of same commodity is also known as Total Utility i.e. Total of utility derived from the consumption of first unit Chocolate and utility from second unit of chocolate is known as Total Utility. Consumer always want to maximise their Total Utility.

RELATIONSHIP BETWEEN TOTAL UTILITY & MARGINAL UTILITY

Relationship between Marginal Utility and Total Utility can be explained with the help of following diagram:

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From the above diagram it can be obtained that:

• When MU is Positive, TU Increases
• When MU is Zero, TU is Maximum
• When MU is Negative, TU begins to fall

Marginal Utility can be positive, Negative or Zero. But Total Utility is always Positive. At the beginning TU increases then after reaching its maximum point it starts to decline.

LAW OF DIMINISHING RETURN

This law states that marginal utility tends to decline as more and more units of commodity are consumed by a consumer, the intensity of desire for a commodity tends to decrease. This is called law of diminishing marginal utility.

It is also called ‘Fundamental Law of Satisfaction’ or ‘Fundamental Psychological Law’.

Basic Assumptions of this law are;

• Only standard units of the commodity are consumed. Like a cup of tea not its spoon.
• Consumption of the commodity should be continuous.
• Commodity should be of same nature
• Law of diminishing return can be best explain with the following Table;

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Law of diminishing return can be best explain with the following Example;�

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Here in this table Marginal Utility (MU) tends to diminish as consumption increases. It is important to note that as more and more units of Chocolate are consumed by the consumer, marginal Utility (MU) tends to diminish. When consumer consumes 6^th units of Chocolate MU will become Zero (0) and after that at the consumption of 7^th unit of Chocolate, MU become Negative