UTILITY

Submitted by:
Bhoomika D. Jethwani

Submitted to:
Mr. Aniket Nargundkar
WHAT IS UTILITY ?
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,
“Wants satisfying capacity of goods
or services is called Utility.”
CHARACTERISTICS OF UTILITY
1. Utility has no Ethical or Moral Significance
2. Utility is Psychological
3. Utility is always Individual and Relative
4. Utility is not Necessarily Equated with Usefulness
5. Utility cannot be Measured Objectively
6. Utility Depends on the Intensity of Want
7. Utility is Different from Pleasure
8. Utility is also Distinct from Satisfaction
DIFFERENT TYPES OF
UTILITY
1. Form Utility : This utility is created by changing the form or shape of the materials. For
example—A cabinet turned out from steel furniture made of wood and so on. Basically,
from utility is created by the manufacturing of goods.
2. Place Utility: This utility is created by transporting goods from one place to another. Thus,
in marketing goods from the factory to the market place, place utility is created. Similarly,
when food-grains are shifted from farms to the city market by the grain merchants, place
utility is created.
3. Time Utility: Storing, hoarding and preserving certain goods over a period of time may
lead to the creation of time utility for such goods
4. Service Utility: This utility is created in rendering personal services to the customers by
various professionals, such as lawyers, doctors, teachers, bankers, actors etc.
 KINDS OF UTILITY
Utility are of three kinds:

(i) Marginal Utility,

(ii) Total Utility,

(iii) Average Utility

 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 by the consumer.

Marginal utility is of three kinds:

(i) Positive Marginal Utility,
(ii) Zero Marginal Utility,
(iii) Negative Marginal Utility.
LAW OF DIMINISHING
MARGINAL UTILITY
Alfred Marshall, British Economist defines the law of diminishing marginal utility as follows:
“The additional benefit which a person derives from a given increase in the stock of a thing diminishes
with every increase in the stock that he already has.”

o This law is based on the fundamental tendency of human nature.

o Human wants are virtually unlimited.
o However, every single want is satiable.
o Hence, as we consume more and more units of a good, the intensity of our want for the good decreases.
o Eventually, it reaches a point where we no longer want it.
o In other words, as we consume more units of a good, the extra satisfaction that we derive from the extra unit
keeps falling.
o However, it is important to remember that the marginal utility declines NOT the total utility.
 EXAMPLE TO ILLUSTRATE
The table represents the total and marginal utility
derived by Peter from consuming cups of tea per
day:
When Peter consumes one cup of tea in a day, he derives a
total utility of 30 utils (unit of utility) and a marginal utility of
30 utils.
 When he takes two cups per day, the total utility rises to 50
utils but the marginal utility falls to 20.
This trend continues until the last row where the marginal utility
is negative.
This means that if Peter consumes 11 or more cups of tea per
day, then he might fall sick.
GRAPH OF DIMINISHING
MARGINAL UTILITY
Helps us understand how a consumer reaches equilibrium in
case of a single commodity.
Consumer utilizes a commodity until its marginal utility becomes
equal to the market price.
This ensures that he derives maximum satisfaction by being in
equilibrium in respect of the quantity of the commodity.
In case of a fall in the price of the commodity, the equality
between marginal utility and price gets disturbed.
“In case of fall, consumer will consume more units of the good
leading to a fall in the marginal utility. “
He continues consuming until the equilibrium is achieved.
“In case of a rise in the price of the commodity, he will consume
less and achieve equilibrium too.”
TOTAL UTILITY
Total Utility is the utility from all units of
consumption.

According to Mayers :
”Total Utility is the sum of the marginal utilities
associated with the consumption of the
successive units.”
AVERAGE UTILITY
Average Utility is that utility in which the total unit of consumption of goods is divided by
number of Total Units. The Quotient is known as Average Utility.

It is clear from the above table that by the increasing use of any article Marginal and
Average Utility reduces gradually and Total Utility increases only up to that point where the
Marginal Utility comes to zero.
RELATIOHSHIP BETWEEN
TOTAL & MARGINAL UTILITY
Total Utility or Full Satiety – is the sum of utility derived
from different units of a commodity consumed by a
consumer.

Total Utility = the sum total of all marginal utility.

Marginal Utility or Marginal Satiety – is the additional

utility derived from the consumption of an additional unit
of a commodity.

Marginal Utility = the addition made to the Total Utility

by consuming one more unit of a commodity.
RELATIONSHIP BETWEEN
TOTAL & MARGINAL UTILITY
o As the total utility rises, the marginal utility
diminishes

o When the total utility is maximum, the marginal

utility is zero.

o As the total utility starts diminishing, the

marginal utility becomes negative.
 IMPORTANT POINTS
- Marginal Utility goes on diminishing with the consumption of every
additional unit of commodity.
- Total Utility goes on increasing with the consumption of every additional
unit but at a diminishing rate.
- 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.
- When Marginal Utility becomes 0, total utility does not increase.
- When Marginal Utility becomes negative, Total Utility decreases.
- Increase in Total Utility depends on Marginal Utility.
- Since Marginal Utility diminishes, Total Utility increases at a diminishing
rate.
- When Marginal Utility is Zero, Total Utility is maximum.
- When Marginal Utility is negative, Total Utility declines.
THANK YOU !!