UTILITY

 Utility analysis explains a consumers behaviour in relation to maximization of

satisfaction.

 Features of utility;
→ Relative concept- utility is related to time and place and varies from time to time
and place to place.
→ Subjective concept- psychological concept, it differs from person to person due
to differences in taste, preferences, likes and dislikes etc.
→ Ethically neutral concept- this concept of utility has no ethical consideration.
The commodity should satisfy any want of a person without consideration of
what is good or bad.
→ Utility differs from usefulness- utility is the capacity to satisfy human wants
whereas usefulness indicates value in use of the commodity. Eg, milk has utility
and usefulness for a consumer but liquor does not have usefulness.
→ Utility differs from pleasure- a commodity may possess utility but maybe not
provide pleasure, for Eg, and injection may treat a patient but may not provide
any form of pleasure.
→ Utility differs from satisfaction- utility is the cause of consumption, satisfaction
is the end of it. They are interrelated but still different concepts.
→ Measurement of utility is hypothetical- utility is an abstract concept. Cardinal
or numerical measurement of utility is not possible.
→ Utility is multi-purpose- a commodity can not only satisfy one want of a person
but can be put to several uses. Eg, electricity can be used to operate a fan, light,
refrigerator.
→ Utility depends on the intensity of want- more intense the want, greater will be
the utility. As the urgency of want declines, utility diminishes.
→ Utility is the basis of demand- a person will demand a commodity only if it
gives utility to him.

 Types of utility;
→ Form utility- when utility is created due to change in shape or structure of an
existing material. Eg, toy made out of clay.
→ Place utility- when utility of a commodity increases due to a change in its place.
Eg, woolen clothes have utility in cold places.
→ Service utility-when personal services are rendered by various professionals. Eg,
service of doctors and teachers etc.
→ Knowledge utility- when a consumer acquires knowledge about a particular
product. Eg, utility of a mobile phone or a computer increases when a person
knows about its various functions.
→ Time utility- when the utility of a commodity increases with a change in its time
of utilization. eg, a student has more utility for textbooks during a examinations
than during vacations.
→ Possession utility- possession utility arises when the ownership of goods is
transferred from one person to another. Eg, transfer of goods from sellers to the
buyers.

 Concepts of utility;
→ Total utility- (TU) refers to the aggregate of utility derived by the consumer from
all units of a commodity consumed. It is an aggregate of utilities from all
successive units of a commodity consumed.
→ Marginal utility- refers to the additional utility derived by a consumer from
additional units of a commodity consumed. It is the addition made by the last unit
of a commodity consumed.

 Law of diminishing marginal utility;

Introduction-
→ Proposed by prof. Gossen but discussed in detail by prof. Alfred marshall in his
book ‘Principles of economics’ published in 1890.
→ Law of DMU is a universal in character .
→ It is based on the common consumer behaviour that utility derived diminishes
with the reduction in the reduction in the intensity of want.
→ Statement of the law-
“Other things remaining constant, the additional benefit which a person derives
from a given increase in his stock of a thing, diminishes with every increase in
the stock that he already has.” said Alfred marshall.
The more of a thing you have, the less you want to have more of it .
Marginal utility the any consumer derives from successive units of a particular
commodity goes on diminishing as his or her total consumption of that commodity
increases.

Assumption-
→ Rationality- consumer is assumed to be rational, meaning that his behaviour is
normal and he tries to maximize his satisfaction.
→ Cardinal measurement- the law assumes that utility can be measured cardinally
or numerically. Mathematical operations are easily possible to know and compare
the utility derived from each unit of a commodity.
→ Homogeneity- the law assumes that all units of a commodity are identical in
shape, size, color, taste, etc and need to be exactly homogeneous.
→ Continuity- all units of a commodity need to be consumed in quick succession
without any lapse of time.
→ Reasonability- all units of a commodity need to be consumed in a reasonable
size. Neither too big, nor too small.
→ Constancy- all related factors like income, taste and preference, of a consumer
should remain constant.
→ Divisibility- the law assumes that the commodity consumed is divisible so that it
can be acquired in small quantities.
→ Single want- a given commodity can satisfy a single want of a person. The law
assumes an experience of single want which is completely satiable as a given
point of time.

Exceptions-
→ Hobbies- in hobbies such as collection of stamps, stones , coins etc the law does
not hold true because with every additional unit, the marginal utility of a person
increases. With an increase in the stock, the pleasure increases. This violates the
assumption of homogeneity and continuity.
→ Miser- every additional rupee gives the miser more and more satisfaction. MU of
money tends to increase with an increase in stock of money. This violates the
assumption of rationality.
→ Addiction- as observed in case of drunkards, the level of intoxication increases
with every additional unit of liquor consumed .it is only an illusion. This is
similar with all forms f addiction. This violates the assumption of rationality.
→ Power- when a person acquires power, his lust for power increases. The desire to
have more keeps increasing. Violates the assumption of rationality.
→ Money- the MU of money never becomes zero. Its increases as the stock
increases. This is because money is a medium of exchange through which other
wants are satisfied. Some economist believe that the law is applicable to money
too, as MU of money os more to a poor than to a rich person.

Criticisms of the law-

→ Unrealistic assumptions- the law is based on various assumptions, like
continuity, rationality, homogeneity etc but in reality it is difficult to fulfil all
these conditions at a point of time.
→ Cardinal measurement- the law assumes that utility can be expressed cardinally,
so that it can be added, compared through a schedule. But in reality, cardinal
measurement of utility is not possible because utility is a psychological concept.
→ Indivisible goods- this law is not applicable to indivisible goods like a television
set or a car etc, which are normally purchased in a single unit at a time.
→ A single want- the law is restricted to the satisfaction of a single want at a point
of time. In reality, a man has to satisfy many wants at a point of time.
→ Constant MU of money- the law assumes that MU of each unit of money
remains constant. But the MU of money differs from person to person. It is
influenced by the change in price, stock of money etc.

Significance or importance of the law-

→ Usefulness to consumers- creates awareness among consumers. To obtain
maximum utility from the limited resources, it is necessary to diversify the
consumption.
→ Useful to the government- to frame various policies such as progressive tax
policy, trade policy, pricing policy, etc.
→ Basis of paradox of values- it includes goods that have more value-in-use and
zero or less value-in- exchange such as air, water, sunshine etc, as well as goods
that have more value-in-exchange and less value-in-use such as gold, diamonds,
etc.
→ Basis of law of demand- the law of demand is based on the law of diminishing
marginal utility. According to law of demand, the quantity demanded of a good,
rises with a fall in price and falls with a rise in its price. When a consumer
purchases more and more units of a good, the MU slowly declines, therefore he
will only buy more units at a lower price.
Relation between TU and MU-

the figure shows that total utility curve slopes upwards while marginal utility curve
slopes downwards. MU curve shows zero and negative levels of MU whereas TU
curve shows maximum and constant TU level.