Meaning of Utility

Simply said, utility refers to how beneficial something is. The meaning of utility refers to the ability of a commodity to meet human needs in economics. Human needs are satisfied when a product’s utility is high. As a result, “utility” is defined as “wants met by the capability of commodities or services”.

A consumer is someone who makes purchasing decisions based on the level of enjoyment they receive from the items or commodities they use.  The meaning of utility in economics is defined as a customer’s contentment with a service or product. Customers do their best to make rational decisions about which products to buy to maximise their utility.

Product and service utility is also important since it determines the demand for a certain commodity, which in turn affects its value. Consumer pleasure and utility cannot be evaluated or measured in a practical way. The usefulness of a service or commercial product can, however, be measured using a variety of different methods.

Different kinds of utility:

After we have learned about the meaning of utility, we will now know the types of it. Basically, there are three types of utility available, they are:

• marginal utility, 
• total utility, and 
• average utility

What is Marginal utility?

The benefit gained from the final or marginal unit of consumption is referred to as “marginal utility.” An extra unit of a certain product purchased, acquired, or consumed by the consumer provides a consumer with increased utility.

It is the sum of the utility provided by the additional units of the commodity in the overall stock of that commodity. 

Prof. Boulding states that “the increase in overall utility that arises from a unit increase in consumption of any commodity’s marginal utility”.

The law of marginal utility: 

According to the law of declining marginal utility, the marginal utility gained from each extra unit decreases with increasing consumption. The incremental improvement in utility that comes from consuming one more unit is referred to as marginal utility.

An illustration for an example of marginal utility:

Suppose, Mr. Shankar eats five pieces of bread:

• For the 1st loaf of bread, his utility derived is 20
• For the 2nd loaf, his utility derived is 16
• For the 3rd loaf, his utility derived is 12
• For the 4th loaf, his utility derived is 8 and
• For the 5th loaf, his utility derived is 2

In the above illustration, the 5th bread is the marginal unit and the marginal utility or MU obtained for the 5th bread is 2. However, if Mr. Shankar consumes only four breads, then the 4th bread will be the marginal unit and the marginal utility or MU is going to be 8.    

Different Types of Marginal Utility—

There can be either a:

• negative marginal utility
• positive marginal utility
• zero marginal utility

To put it another way, it is common knowledge that the utility of a given item decreases with each subsequent unit of that item received, until it reaches a point where it is no longer useful and the next unit of the item is no better than the previous one. In other terms, “negative utility” can be derived.

Zero Utility: 

When a single unit of a commodity is consumed, it has no effect on the total utility. It is clear that the overall utility is maximised when the Marginal Utility is equal to 0.

Negative Utility: 

A commodity’s overconsumption can lead to dissatisfaction rather than satisfaction, which is what is meant by the term “negative utility”. In these circumstances, the meaning of utility is negative.

i) Total utility:

A person’s total utility is equal to the sum of their individual consumption units. Total utility is the sum of marginal utility associated with the consumption of successive units.

As an example, let’s say that a man eats five loaves of bread at a time. 

• Suppose, the first loaf provides him with 20 satisfaction units, the second loaf gives him a satisfaction of 16 utils. Then TU or total utility from two loaves of bread is 20+16=36 utils. 
• Now, suppose he consumes another loaf and gets a satisfaction of 12 utils and then he consumes a fourth loaf where he gets a satisfaction of 8 utils, and finally he consumes the last loaf for which his satisfaction is 4 utils. 
• So, the Total Utility of all 5 loaves of bread is: TU= 20+16+12+8+4=60 utils.

ii) Average Utility:

Average Utility is the utility in which the total unit consumption of commodities or Total Utility is divided by the total number of units. 

• In simple words:                Average Utility=                 Total Utility/Total number of units consumed
• So, if we take the above example=     Total utility= 60 utils

Total units consumed= 5

• As a result, the AU or Average Utility= 60 ÷ 5= 12 utils.

The relationship between marginal and total utility:

There is a strong correlation between the two.

• The law of marginal utility states that marginal Utility decreases as the unit of given commodity increases, whereas the Total Utility increases.
• Until the Marginal Utility is zero, the Total Utility will continue to rise. 
• Total Utility is at its maximum when Marginal Utility is zero.

Marginal utility becomes negative after zero, which causes the total utility to decrease. The following relationship can be established between total utility and marginal utility:

• Marginal Utility decreases, and as long as Marginal Utility is not zero, the total utility increases.
• Total utility is maximised when marginal utility is zero.
• Total Utility decreases after zero when the Marginal Utility is negative.

Things to remember while learning what marginal utility is:

• The example of marginal utility suggests when you eat one more piece of bread, your marginal utility decreases.
• The rate at which total utility increases with each new unit used, however, is decreasing.
• Total utility increases by the same amount as marginal utility. The Marginal Utilities generated from all the used units total the Total Utility.
• In other words, when Marginal Utility reaches 0, total utility does not improve.
• Total Utility drops if Marginal Utility is negative.
• Marginal Utility has a direct impact on total utility.
• Total Utility increases at a decreasing pace because Marginal Utility decreases.
• Marginal Utility is zero when Total Utility is at its highest point. 
• Total Utility decreases when Marginal Utility is negative.

Conclusion:

Here we have understood the meaning of utility, and its kinds. We have here tried to cover the concepts of what is total, marginal and negative utility. Moreover, we have gone through marginal utility in detail and touched upon the principles of negative, positive and zero marginal utility with examples. There are a few points which you must remember such as marginal utility impacts total utility directly, total utility decreases when marginal utility is negative, and Marginal utility = total utility (when TU reaches its highest point).