Table of Contents
INTRODUCTION
In Economics, consumers buy goods and services because they satisfy wants. The satisfaction that a person gets from consuming a good or service is called utility. For example, when a hungry student eats food, the satisfaction gained from eating the food is utility.
Utility differs from one person to another because people have different tastes and preferences. Utility theory explains how consumers make decisions about what to buy using their limited income.
THE CONCEPT OF UTILITY
Utility is the satisfaction, pleasure, or usefulness a consumer derives from consuming a good or service. It does not necessarily mean usefulness in the ordinary sense.
A product may not be useful to everyone, but it can still provide satisfaction to a consumer. For example:
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A student may derive utility from soft drinks.
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A farmer may derive utility from farming tools.
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A teacher may derive utility from books.
Important Points About Utility
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Utility is subjective, meaning it differs from person to person.
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Utility cannot be touched or seen physically.
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Utility changes according to need and time.
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Utility helps consumers make decisions.
Example: A hungry person gets high satisfaction from food, but after eating many plates, the satisfaction begins to reduce.
TYPES OF UTILITY
Utility can be classified into 5 different forms.
1. Form Utility
Form utility refers to the satisfaction created when the form or shape of raw materials is changed into finished goods that can better satisfy human wants. Manufacturers create form utility by processing or transforming materials into more useful products.
For example, wood is converted into furniture, cotton is turned into clothes, and cocoa is processed into chocolate. The finished products usually provide greater satisfaction to consumers than the raw materials because they are more convenient and ready for use.
2. Place Utility
Place utility is created when goods are moved from where they are produced to where they are needed for consumption. Transportation and distribution services help create place utility by ensuring that products are available in markets where consumers can access them.
For example, yams produced in rural farming areas are transported to cities for sale, while petroleum products are moved from depots to filling stations. Without movement from one location to another, many goods would not satisfy consumer needs effectively.
3. Time Utility
Time utility occurs when goods are stored and made available at the right time they are needed by consumers. Producers and traders create time utility by preserving products for future use, especially during periods of scarcity.
For instance, farmers may store grains after harvest and release them later when supply is low, while supermarkets refrigerate beverages to keep them available for customers. Time utility helps to stabilise supply and ensure that goods remain accessible when demand increases.
4. Possession Utility
Possession utility arises when ownership of a product changes from the seller to the buyer, allowing the consumer to derive satisfaction from using it. This type of utility is created through trade and exchange.
A product may exist and be useful, but it only provides satisfaction to a person after it has been purchased or legally acquired. For example, when a student buys a textbook or a family purchases a television, possession utility is created because ownership has transferred to the consumer.
5. Service Utility
Service utility refers to the satisfaction consumers derive from services rendered by professionals or organisations. Unlike physical goods, services are intangible and cannot be touched, yet they satisfy human wants directly.
Examples include: medical treatment from doctors, teaching by teachers, transport services by drivers, and banking services offered by financial institutions.
Service utility improves welfare because it provides comfort, convenience, knowledge, security, and other benefits that meet consumer needs.
CONCEPTS OF TOTAL, MARGINAL AND AVERAGE UTILITY
A. Total Utility (TU)
Total utility is the total satisfaction obtained from consuming all units of a commodity.
Formula:
TU = Sum of all utilities obtained
Example
If a student eats three oranges:
1st orange = 10 utils.
2nd orange = 8 utils.
3rd orange = 5 utils.
Total Utility = 10 + 8 + 5 = 23 utils.
B. Marginal Utility (MU)
Marginal utility is the additional satisfaction gained from consuming one extra unit of a commodity.
Formula:
MU = Change in Total Utility / Change in Quantity
Example:
If total utility increases from 20 to 26 after eating another orange:
MU = 26 − 20 = 6 utils.
C. Average Utility (AU)
Average utility is the utility obtained per unit consumed.
Formula:
AU = Total Utility / Quantity Consumed
Example:
If total utility is 30 and quantity consumed is 5:
AU = 30 / 5 = 6 utils
RELATIONSHIP BETWEEN TOTAL UTILITY AND MARGINAL UTILITY
The relationship between total utility (TU) and marginal utility (MU) shows how the satisfaction gained from consuming goods changes as more units are consumed.
Marginal utility is the additional satisfaction obtained from consuming one extra unit of a commodity, while total utility is the total satisfaction derived from all units consumed.
When marginal utility is positive, total utility increases because each extra unit adds satisfaction.
As marginal utility begins to diminish but remains positive, total utility continues to rise, but at a slower rate. Total utility reaches its maximum point when marginal utility becomes zero, meaning the consumer gains no extra satisfaction from an additional unit.
If marginal utility becomes negative, total utility starts to decline because additional consumption causes dissatisfaction. Therefore, marginal utility determines whether total utility rises, remains constant, or falls.
SUMMARY
Utility refers to satisfaction derived from consumption. Consumers aim to maximise utility with limited income. Total utility measures total satisfaction, marginal utility measures extra satisfaction, while average utility measures satisfaction per unit.
The law of diminishing marginal utility explains why extra units bring lower satisfaction. Utility theory helps explain demand, consumer equilibrium, consumer surplus, and indifference curves.
Read Also: Understanding the Basic Concepts of Demand and Supply
