Kinds of utility

Classification of Utility

1. CLASSIFICATION of utility

2. UTILITY IS CLASSIFIED INTO INITIAL UTILITY MARGINAL UTILITY TOTAL UTILITY

3. The Utility derived from the first unit of a commodity is called initial utility. Utility of the first loaf of bread is called initial utility. Initial utility of a commodity is always positive. For example , if there are four loafs of bread giving utility of 10,12,13 and 14 . Here the utility of the first loaf of bread i.e 10 is the initial utility. INITIAL UTILITY

4. MARGINAL UTILITY Marginal utility is the utility derived from consuming one additional unit of a product or service. It refers to the additional utility derived from an extra unit of the given commodity purchased, acquired or consumed by the consumer. It is the net addition to total utility made by the utility of the additional or extra units of the commodity in its total stock. According to Prof. Boulding—”The marginal utility of any quantity of a commodity is the increase in total utility which results from a unit increase in its consumption.” For example Mr. Joseph is consuming bread and he takes five breads. By taking first unit he derives utility up to 20; second unit 16; third unit 12; fourth unit 8 and from fifth 2. In this example the marginal unit is fifth bread and the marginal utility derived is 2. If he will consume only four breads then the marginal unit will be fourth bread and utility will be 8. Marginal utility can be measured with the help of the following formula: or TUn = Total utility derived from the consumption of n units , TUn- 1= Total utility derived from the consumption of n-1 units , ᐃ TU= Change in total utility ᐃ Q= Change in quantity MU n = TU n – TU n-1 MU = ᐃ TU ᐃ Q MARGINAL UTILITY

5. TYPES OF MARGINAL UTILITY POSITIVE MARGINAL UTILITY : Positive marginal utility occurs when the consumption of an additional item increases the total utility. Positive marginal utility  is when buying extra versions of an item is satisfying. Positive marginal utility is defined as the increment in total utility with the consumption of one more unit of a good or service. NEGATIVE MARGINAL UTILITY : When the consumption of the additional unit causes a fall in the total utility, it means the marginal utility of that unit is negative. Negative utility is also known as disutility. Negative Marginal Utility means that at some point, you are worse off by consuming an extra unit of a product. Negative marginal utility would mean that, now the total utility will reduce. This means the consumption of the product is causing a reduction in the overall satisfaction of the consumer ZERO MARGINAL UTILITY : When the consumption of an additional unit of commodity causes no change in the total utility, it means the marginal utility of the additional unit is zero. At this level of consumption total utility is maximum and the customer will be at his saturation point. Zero marginal utility occurs when purchasing additional units of an item provides no more utility, but it is also not actively detrimental as in the case of negative marginal utility.

6. Relation Between Total Utility and Marginal Utility Units of Goods Consumed Marginal Utility Total Utility I II III IV V VI 6 4 Positive 2 0 Zero -2 Negative -4 6 10 12 12 10 6

7. The Utility derived by a person from the total number of units of a commodity consumed by him is called total utility. Total utility is the aggregate summation of satisfaction or fulfillment that a consumer receives through the consumption of goods or services. For example U 1 ,U 2 ,U 3 ………U n represents the utility derived from the first, second, third and the nth unit of commodity then total utility TUn will be or TU n = U 1 +U 2 +U 3 ……+U n TU n =   TOTAL UTILITY

8. FORMS OF UTILITY FORM UTILITY FORM UTILITY PLACE UTILITY POSSESSION UTILITY TIME UTILITY FORMS OF UTILITY

9. Form utility is created by the design of the product or service itself. The more specifically a good or service is targeted towards customer needs and desires, the higher its perceived added value (i.e. form utility) will be. In other words, form utility is obtained by transforming customer needs into products or services. To do this, companies analyze their target markets and survey potential customers to find out what they need. This information can then be used to align product features with actual customer needs. Thus, form utility can be created through things such as high quality materials, ergonomic design, or a wide selection of options to chose from. Place utility can be obtained through the process of making a good or service more easily available to potential customers. The easier it is to purchase a product, the more attractive it becomes. Thus, place utility has a lot to do with distribution channels and the physical locations at which goods or services are sold. Additionally, some economists argue that even things like the discoverability of the product on the internet through search engine optimization has an effect on place utility. After all, a wide variety of goods and services can be bought online these days. .  FORM UTILITY PLACE UTILITY

10. Time utility is created by providing easy availability of a good or service at the time when customers need or want it. The more easily and quickly a product can be purchased (and used) at that time, the higher its perceived time utility is. In addition to that, time utility is always high in times of scarcity. Hence, a company’s supply chain management has a significant impact on time utility. Among others, this includes processes such as logistics and delivery as well as storage. Companies are constantly improving their supply chain management, which has led to services such as same-day delivery and 24/7 availability Possession utility describes the benefits that can be derived from owning and using a specific product. Generally speaking, the more “useful” a product is to an individual, the higher its possession utility will be. In some cases – especially according to marketing theory – the term possession utility is also used in the context of facilitating possession, i.e. through easy payment methods such as credit cards or leasing contracts. The reasoning behind this is that a simpler acquisition process usually leads to a higher perceived value of a good or service. TIME UTILITY POSSESSION UTILITY

11. Thank you Pervaiz Ahmad Mir