UTILITY

Key Points to be discussed :

 Utility
 Cardinal Utility Vs Ordinal Utility
 Total Utility and Marginal Utility
 Law of Diminishing Marginal Utility
 Law of Equi-marginal utility
 Exception or Limitation of Law of Marginal Utility
 Graphical Presentation of Total Utility & Marginal Utility.
• What Is Utility?
• Utility is an economic term coined by the noted 18th century Swiss
mathematician Daniel Bernoulli referring to the total satisfaction received
from consuming a good or service. Economic theories based on rational choice
usually assume that consumers will strive to maximize their utility. The
economic utility of a good or service is important to understand because it will
directly influence the demand, and therefore price, of that good or service. A
consumer's utility is impossible to measure; however, some economists
believe that they can indirectly estimate utility by various means.

• Utility: The amount of happiness or pleasure created through the

consumption of a good or a service is called utility.
• There are different schools of thought regarding the measurability of utility.
• Ordinalists believe that utility can’t be measured , can only be compared. For
example , an individual can say that his utility from the consumption of an
apple is greater than utility from an orange.
• Cardinalists, on the other hand , opine that individual knows for certain- how
much utility is obtained from the consumption of an apple or an orange.
• Total Utility : Amount of satisfaction obtained from the
consumption of a certain quantity of a good or service is
called total utility.
• Marginal Utility : Change in total utility due to change one
unit change in consumption is called marginal utility.

• MU=

If the utility of the first slice of

• MU= pizza is 10 utils and the utility of
the second slice is 8 utils, the
• MU=8 MU of eating the second slice is-

• 8 utils.

• MU= (TU), U= 100q-

• MU= 100-2q
 Difference Between Cardinal and Ordinal Utility

• The utility is a psychological phenomenon; that implies the

satisfying power of a good or service. It differs from person
to person, as it depends on a person’s mental attitude. The
measurability of utility is always a matter of contention.
The two principal theories for the utility are cardinal utility
and ordinal utility. Many traditional economists hold the
view that utility is measured quantitatively, like length,
height, weight, temperature, etc. This concept is known
as cardinal utility concept.
• On the other hand, ordinal utility concept expresses the
utility of a commodity in terms of ‘less than’ or ‘more than’.
Take a read of the article to know the important differences
between cardinal and ordinal utility.
 Cardinal Utility
• Definition of Cardinal Utility
• The notion of Cardinal utility was formulated by Neo-classical
economists, who hold that utility is measurable and can be
expressed quantitatively or cardinally, i.e. 1, 2, 3, and so on. The
traditional economists developed the theory of consumption based
on cardinal measurement of utility, for which they coined the term
‘Util‘ expands to Units of utility. It is assumed that one util is equal
to one unit of money, and there is the constant utility of money.

• Further, it has been realized with the passage of time that the
cardinal measurement of utility is not possible, thus less realistic.
There are many difficulties in measuring utility numerically, as the
utility derived by the consumer from a good or service depends on
a number of factors such as mood, interest, taste, preferences and
much more
 Ordinal Utility
• Definition of Ordinal Utility
• Ordinal Utility is propounded by the modern economists, J.R. Hicks,
and R.G.D. Allen, which states that it is not possible for consumers
to express the satisfaction derived from a commodity in absolute or
numerical terms. Modern Economists hold that utility being a
psychological phenomenon, cannot be measured quantitatively,
theoretically and conceptually. However, a person can
introspectively express whether a good or service provides more,
less or equal satisfaction when compared to one another.

• In this way, the measurement of utility is ordinal, i.e. qualitative,

based on the ranking of preferences for commodities. For example:
Suppose a person prefers tea to coffee and coffee to milk. Hence,
he or she can tell subjectively, his/her preferences, i.e. tea > coffee
> milk.
 Key Differences Between Cardinal and Ordinal Utility
• The following points are noteworthy so far as the difference between cardinal and
ordinal utility is concerned:
• Cardinal utility is the utility wherein the satisfaction derived by the consumers
from the consumption of good or service can be measured numerically. Ordinal
utility states that the satisfaction which a consumer derives from the consumption
of product or service cannot be measured numerically.
• Cardinal utility measures the utility objectively, whereas there is a subjective
measurement of ordinal utility.
• Cardinal utility is less realistic, as quantitative measurement of utility is not
possible. On the other end, the ordinal utility is more realistic as it relies on
qualitative measurement.
• Cardinal utility, is based on marginal utility analysis. As against this, the concept of
ordinal utility is based on indifference curve analysis.
• The cardinal utility is measured in terms of utils, i.e. units of utility. On the
contrary, the ordinal utility is measured in terms of ranking of preferences of a
commodity when compared to each other.
• Cardinal utility approach propounded by Alfred Marshall and his followers.
Conversely, ordinal utility approach pioneered by Hicks and Allen.
Utility analysis
• The Definition of Total Utility
• If utility is cardinal and measurable, the total utility (TU) is defined as the
sum of the satisfaction that a person can receive from the consumption of
all units of a specific product or service. Using the example above, if a
person can only consume three slices of pizza and the first slice of pizza
consumed yields 10 utils, the second slice of pizza consumed yields 8 utils
and the third slice yields 2 utils, the total utility of pizza would be 20 utils.
• The Definition of Marginal Utility
• Marginal utility (MU) is defined as the additional (cardinal) utility gained
from the consumption of one additional unit of a good or service or the
additional (ordinal) use that a person has for an additional unit. Using the
same example, if the utility of the first slice of pizza is 10 utils and the
utility of the second slice is 8 utils, the MU of eating the second slice is 8
utils. If the utility of a third slice is 2 utils, the MU of eating that third slice
is 2 utils. In ordinal utility terms, a person might eat the first slice of pizza,
share the second slice with their roommate, save the third slice for
breakfast, and use the fourth slice as a doorstop.
Law of Diminishing Marginal Utility
Utils: 'Utils' is considered as the measurable 'unit' of utility.
Explanation for the Law of Diminishing Marginal Utility:
We can briefly explain Marshall’s theory with the help of an example. Assume that a
consumer consumes 6 apples one after another. The first apple gives him 20 utils
(units for measuring utility). When he consumes the second and third apple, the
marginal utility of each additional apple will be lesser. This is because with an increase
in the consumption of apples, his desire to consume more apples falls.
Therefore, this example proves the point that every successive unit of a commodity
used gives the utility with the diminishing rate.
We can explain this more clearly with the help of a schedule and diagram.

Assumptions of Law of diminishing utility:

• Units of goods are homogenous.
• No time gap between the consumption of the different units.
• Tastes, fashion, preferences, and priorities remain unchanged.
• Consumer aims at maximum satisfaction.
• Consumer’s income is fixed and limited.
Law of Diminishing Marginal Utility
• Law of Diminishing Marginal Utility:
• The law of diminishing marginal utility is comprehensively explained by
Alfred Marshall. According to his definition of the law of diminishing
marginal utility, the following happens:
• “During the course of consumption, as more and more units of a
commodity are used, every successive unit gives utility with a diminishing
rate, provided other things remaining the same; although, the total utility
increases.”
We know that Utility is the capacity of a commodity through which human
wants are satisfied.

• Law of Diminishing Marginal Utility:

The law of diminishing marginal utility is comprehensively explained by
Alfred Marshall. According to his definition of the law of diminishing
marginal utility, the following happens:
“During the course of consumption, as more and more units of a
commodity are used, every successive unit gives utility with a diminishing
rate, provided other things remaining the same; although, the total utility
increases.”
Law of Diminishing Marginal Utility
• Assumptions in the Law of Diminishing Marginal Utility:
For the law of diminishing marginal utility to be true, we need to
make certain assumptions. Each assumption is quite logical and
understandable. If any of the assumptions are not true in the case,
the law of diminishing marginal utility will not be true.
Following are the assumptions in the law of diminishing utility:
• The quality of successive units of goods should remain the same. If
the quality of the goods increase or decrease, the law of
diminishing marginal utility may not be proven true.
• Consumption of goods should be continuous. If there comes a
substantial break in the consumption of goods, the actual concept
of diminishing marginal utility will be altered.
• Consumer’s mental outlook should not change.
• Unit of good should not be very few or small. In such a case, the
utility may not be measured accurately.
Law of Diminishing Marginal Utility
Schedule for Law of Diminishing Marginal Utility:
Unit of Total Utility Marginal Utility
Consumption
1 20 20
2 35 15
3 45 10
4 50 5
5 50 0
6 45 -5

The schedule explains that with each additional unit consumed the
marginal utility increases with a diminishing rate. After the saturation
point though, the utility starts to fall.
Law of Diminishing Marginal Utility
In the above table, the total utility obtained from the first
apple is 20 utils, which keep on increasing until we reach our
saturation point at 5th apple. On the other hand, marginal
utility keeps on diminishing with every additional apple
consumed. When we consumed the 6th apple, we have gone
over the limit. Hence, the marginal utility is negative and the
total utility falls.
With the help of the schedule, we have made the following
diagram:
Total Utility & Marginal Utility
Law of Diminishing Marginal Utility
Saturation Point: The point where the desire to consume the
same product anymore becomes zero.
Disutility: If you still consume the product after the saturation
point, the total utility starts to fall. This is known as disutility.
When the first apple is consumed, the marginal utility is 20.
When the second apple is consumed, the marginal utility
increases by 15 utils, which is less than the marginal utility of
the 1st apple – because of the diminishing rate. Therefore, we
have shown that the utility of apples consumed diminishes
with every increase of apple consumed.
• Similarly, when we consumed the 5th apple, we are at
our saturation point. If we consume another apple, i.e.
6th apple, we can see that the marginal utility curve has fallen
to below X-axis, which is also known as ‘disutility’.
Law of Equi-Marginal Utility
Law of Equi-Marginal Utility explains the relation between the
consumption of two or more products and what combination of
consumption these products will give optimum satisfaction.
Marginal Utility is the additional satisfaction gained by consuming
one more unit of a commodity.
Assumptions of the Law
• There is no change in the price of the goods or services.
• The consumer has a fixed income.
• The marginal utility of money is constant.
• A consumer has perfect knowledge of utility.
• Consumer tries to have maximum satisfaction.
• The utility is measurable in cardinal terms.
• There are substitutes for goods.
• A consumer has many wants.
Law of Equi-Marginal Utility
• Law of Equi-Marginal Utility
• This law is based on the principle of obtaining maximum
satisfaction from a limited income. It explains the behavior of a
consumer when he consumes more than one commodity.
• The law states that a consumer should spend his limited income on
different commodities in such a way that the last rupee spent on
each commodity yield him equal marginal utility in order to get
maximum satisfaction.
• Suppose there are different commodities like A, B, …, N. A
consumer will get the maximum satisfaction in the case of
equilibrium i.e.,
• MUA / PA = MUB / PB = … = MUN / PN
• Where MU’s are the marginal utilities for the commodities and P’s
are the prices of the commodities.
Law of Equi-Marginal Utility
=2, =1, Budget =maximum 7
Unit 𝑨 𝑩
1 10 6
2 8 5
3 6 4
4 4 3
5 2 2

Limitation of the Law:

• The law is not applicable in case of knowledge. Reading books provides more
• knowledge and has more utility.
• This law is not applicable in case of fashion and customs.
• This law is not applicable for very low income.
• There is no measurement of utility.
• Not all consumer care for variety.
• The law fails when there are no choices available for the good.
• The law fails in case of frequent price change.
Law of Diminishing Marginal Utility
Exceptions for the Law of Diminishing Marginal Utility:
• The law of diminishing marginal utility states that with the
consumption of every successive unit of commodity yields
marginal utility with a diminishing rate. However, there are
certain things on which the law of diminishing marginal utility
does not apply.

Following are the exceptions for this law:

• Desire for money.
• Desire for knowledge.
• Use of liquor or wine.
• Collection of rare objects.
Law of Diminishing Marginal Utility
The exceptions or limitations to the law of diminishing utility.

(i) Case of intoxicants: Consumption of liquor defies the low for a short
period. The more a person drinks, the more likes it. However, this is truer only
initially. A stage comes when a drunkard too starts taking less and less liquor
and eventually stops it.

(ii) Rare collection: If there are only two diamonds in the world, the
possession of 2nd diamond will push up the marginal utility.

(iii) Application to money: The law equally holds good for money. It is true
that more money the man has, the greedier he is to get additional units of it.
However, the truth is that the marginal utility of money declines with richness
but never falls to zero.
Law of Diminishing Marginal Utility
Exceptions Of The Law Of Diminishing Marginal Utility
There are various limitations / exceptions of the law of diminishing utility.
Major limitations are as follows:

1. Homogeneous Commodity
The law of diminishing marginal utility assumes that there should be single
commodity with homogeneous units. All units of the commodity should
be of the same size and quality. If the units are not identical, this law will
not be applied.

2. No change in tastes, habits, customs, fashion and income of the

consumer
There should not be changed in tastes, habits, customs, fashion and
income of the consumer. If the income of a consumer increases, the
marginal utility of a certain goods will increase. In such case, increase in
consumption may yield greater satisfaction or utility.
Law of Diminishing Marginal Utility
3. Continuity
There should be continuity in the consumption of the commodity;
otherwise the law of diminishing marginal utility will not apply. Units of
the commodity should be consumed in succession at one particular time.
If the interval between the various units of consumption is too long,
marginal utility may become higher.

4. Suitable size of units

Units of the commodity should be of a suitable size. It must not be too
small. For example, giving water to a thirsty man by spoon will increase
the utility of the successive spoon of water.

5. Ordinary commodities
Commodities should be of an ordinary types. If the commodities are likes
diamonds and jewels or hobby commodities like stamps, coins or
paintings, the law of diminishing marginal utility does not apply.
Law of Diminishing Marginal Utility
6. Marginal utility of money not constant
Our intensity for money increases as we have more of it. No doubt the
marginal utility of money does not become zero, but it definitely falls as a
person gets more and more money. The marginal utility of money for a
rich is less than a poor man.

7. Rational consumer
The consumer should be an economic man, who acts rationally. This law
does not apply to persons of special nature such as drunkard, druggist
etc. Marginal utility of wine for drunkard increases with every peg of
drinks.
Law of Diminishing Marginal Utility
Importance of the Law
• This law is helpful in the field of production. A
producer has limited resources and tries to get
maximum profit.
• This law is helpful in the field of exchange. The
exchange is of anything like some goods, wealth, trade,
import, and export.
• It is applicable to public finance.(tax, subsidy)
• The law is useful for workers in allocating the time
between the work and rest.
• It is useful in case of saving and spending.
• It is useful to look for substitution in case of price rise.