UTILITY
Utility????
Introduction
In this chapter, we have to learn the following concepts:
(A) Utility:::
(A.1) Total Utility
(A.2) Marginal Utility
(A.3) Maximize Utility
(B) Law of Diminishing Marginal Utility
(A) The concept of Utility
Why do you buy goods and services? This should be because they provide
you satisfaction - you feel better because you bought them. The economist is
called this satisfaction utility.
In economics, utility on a set of goods and services is a priority; It represents a
well-satisfied satisfaction by the consumer.The concept of rational choice
theory in economics and game theory is an important basis: Since no one can
directly measure profit, satisfaction or happiness from good or service,
economists can demonstrate and measure utility in terms of measurable
economic options.
It is difficult to measure the utility of the consumer, but it can be indirectly
determined with consumer behavioral principles, which believe that consumers
will try to maximize their utility.
Classical economists work under the assumption that all utilities can be
measured as difficult numbers. To help with quantitative measurement of
satisfaction, for the subset of people in different circumstances, the name was
used to produce a specific post or service to show the amount of psychological
satisfaction.
For example, a personal judge who will provide 10 pieces of pizza and a bowl
of pasta will give 12 observations, then the person will know that pasta will be
more satisfying than eating. For producers of pizza and pasta, knowing that the
average bowl of pasta will give 2 extra yields, give a slightly higher price to
pasta than pizza.
(A.1) What is Total Utility
units of an object. It measures the total satisfaction gained from the
consumption of all the units of that good, for example, if 1 ice cream gives you
a satisfaction of 20 utils and the other gives 16 utils, then 2 ice-cream gives 20
+ 16 = 36 utils. If the third ice cream produces 10 boils, then the three ice
creams will have TU 20 + 16 + 10 = 46 utils.
According to the above diagram, Total Utility is maximum at point ‘A’ where the
consumer receive maximum level of satisfaction after consuming Ice-Cream.
After this, TU tends to decline.
(A.2) What is Marginal Utility
Marginal utility is the additional utility gained from the consumption of another
unit of the given item. This is the utility to be obtained from the last unit of the
purchased item. According to the given example, when 3 ice-cream is
consumed, TU is increased from 36 utils to 46 utils.The one more unit of ice-
cream increases the utils by 10.So 10 is the marginal utility.
In Chapman's words, "Commodity utility has been added to total utility by
consuming one unit of one object"
According to the above diagram, the maximum unit of ice cream is consumed,
the MU is starting decline and at one time it becomes zero and then it will
become negative.
(A.3) Maximizing Utility
In Microeconomics, the problem of maximize the utility is the problem which
the consumers usually faced."How should I spend my money to maximize my
usefulness?" In other words, consumers want to consume maximum
satisfaction using less money.
Difference between TU & MU
1. The change in TU is MU.
2. When the MU start decreases, TU increases at decreasing rate.
3. When MU become zero, TU is maximum. It is a saturation point.
4. When MU becomes negative, TU declines.
According to the diagram, TU and MU starts from the same point ‘a’, but as
consumer increases their consumption the TU starts increasing at diminishing
rate, MU declines. As the TU reaches their maximum point MU become zero
(Point of Satiety) ‘b’ and however TU starts decline MU turns negative ‘c’.
(B) Law of Diminishing Marginal Utility
According to the law of diminishing utility utility, more and more units of the
product are consumed, the marginal utility of a person decreases or becomes
negative.
The rule of diminishing marginal utility is widely explained by Alfred Marshall.
According to his definition:
"During consumption, more and more units of an object are used, so each unit
continuously gives utility with a decreasing rate, which holds the other things
the same, however, total utility increases."
According to the above graph, we can say that after each unit of consumption
the MU is decreasing. When the consumer consumes one unit then the MU is
20, but when the consumption is continuously the MU is decreasing and then
becomes negative.
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