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Utility

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Utility Analysis

Utility is a term in  economics that refers 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 directly influences the demand, and therefore price, of that good or service. In practice, a consumer's utility is impossible to measure and quantify. 

Key Points:

  1. Want denotes a feeling of lack of satisfaction.

  2. Wants are unlimited.

  3. They are recurring in nature.

  4. They differ with age, gender, seasons, habits and culture.

  5. Utility is the capacity of a commodity to satisfy human wants. In other words, utility is the want satisfying power of a good.

Features of Utility :

1) Relative concept :

Utility is related to time and place. It varies from time to time and place to place. For example,

(i) woollen clothes have a greater utility in the winter.

(ii) sand has greater utility at the construction site than at the sea shore.

2) Subjective concept :

It is a psychological concept. Utility differs from person to person. This is due to differences in taste, preferences, likes, dislikes, nature, habits,
profession etc. For example, stethoscope has utility to a doctor but not to a layman.


3) Ethically neutral concept :

The concept of utility has no ethical consideration. It is a morally colourless concept. The commodity should satisfy any want of a person without consideration of what is good or bad, desirable or undesirable.

For example, a knife has utility to cut fruits and vegetables as well as it can be used to harm someone. Both wants are of different nature but are satisfied by the same commodity. Thus, utility is ethically neutral.


4) Utility differs from usefulness :

Utility is the capacity of a commodity to satisfy human wants, whereas usefulness indicates value in use of the commodity.

For example, milk has both utility as well as usefulness to a consumer, while liquor has utility only to an addict, but has no usefulness.


5) Utility differs from pleasure :

A commodity may possess utility but it may not give any pleasure to the consumer.

For example, injection for a patient has utility because it cures the ailment but it hardly gives any enjoyment or pleasure to him.


6) Utility differs from satisfaction :

Utility is a cause of consumption, satisfaction is the end result of consumption. They are interrelated but still different concepts. For
example, a thirsty person drinks a glass of water since water has the capacity to satisfy thirst. Utility of water is the cause of consumption and the satisfaction derived is the end result of consumption.

7) Measurement of utility is hypothetical : 


Utility is an abstract concept. Cardinal or numerical measurement of utility is not possible. For example, a thirsty person after drinking water, may derive higher or lower level of utility. Thus, utility can only
be experienced and found either positive, zero or negative. Negative utility is called disutility.


8) Utility is multi-purpose:

A commodity can satisfy the want of more than one person, it can also be put to several uses. For example, electricity can be used to
serve many purposes and for many people at some point of time.


9) Utility depends on the intensity of want :


Utility depends on the intensity of a want. More intense the want, greater will be the utility. As and when the urgency of want declines, utility diminishes. For example, a hungry person finds more utility in food, than a person who is not hungry.


 10) Utility is the basis of demand :

A person will demand a commodity only if it gives utility to him. For example, a sick person has utility in medicines hence, he demands
medicines.

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