Utility

University Of Gujrat, Pakistan

1. Engineering Economics (MS-310) Utility & Its Types DR. NAEEM ABAS KALAIR Electrical Engineering Department, University of Gujrat.

2. Meaning of Utility The simple meaning of ‘utility’ is ‘usefulness’. In economics utility is the capacity of a commodity to satisfy human wants. Utility is the quality in goods to satisfy human wants. Thus, it is said that  “Wants satisfying capacity of goods or services is called Utility.”

3. Meaning of Utility Utility depends upon the intensity of want. When a want is unsatisfied or more intense, there is a greater urge to demand a particular commodity which satisfies a given want. In modern time utility has been called as ‘expected satisfaction.’ Expected satisfaction may be less or equal to or more than the real satisfaction.

4. Definition of Utility According to Prof. Waugh: “Utility is the power of commodity to satisfy human wants.” According to Fraser: “On the whole in recent years the wider definition is preferred and utility is identified, with desireness rather than with satisfyingness.”

5. Characteristics of Utility 1- Utility has no Ethical or Moral Significance A commodity which satisfies any type of want, whether moral or immoral, socially desirable or undesirable, has utility, i.e., a knife has utility as a household appliance to a housewife, but it has also a utility to a killer for stabbing some body.

6. 2- Utility is Psychological Utility of a commodity depends on a consumer’s mental attitude and assessment regarding its power to satisfy his particular want. Psychologically, every consumer has his likes and dislikes and everyone determines his own level of satisfaction. For Example, a consumer who is fond of apples may find a high utility in apples in comparison to the consumer who has no liking for apples. Similarly a strictly vegetarian person has no utility for mutton or chicken.

7. 3- Utility is always Individual and Relative Utility of a commodity varies in different situations in relation to time and place. Even the same consumer may derive a higher or lower utility for the same commodity at different times and different places. For example—a person may find more utility in woolen clothes during the winter than in summer or at Kashmir than at Mumbai.

8. 4- Utility is not Necessarily Equated with Usefulness Utility simply means the ability to satisfy a want. A commodity may have utility but it may not be useful to the consumer. For instance—A cigarette has utility to the smoker but it is injurious to his health. However, demand for a commodity depends on its utility rather than its usefulness.

9. 5- Utility cannot be Measured Objectively Utility being a subjective phenomenon or feeling of a consumer cannot be expressed in numerical terms. So utility cannot be measured cardinally or numerically. It cannot be measured directly in a precise manner. Professor Marshall has however, unrealistically assumed cardinal measurement of utility in his analysis of demand.

10. 6- Utility Depends on the Intensity of Want Utility is the function of intensity of want. A want which is unsatisfied and greatly intense will imply a high utility for the commodity concerned to a person. But when a man is satisfied in the process of consumption it tends to experience a lesser utility of the commodity than before. In other words, the more of a thing we have, the less we want it.

11. 7- Utility is Different from Pleasure A commodity may have utility but its consump­tion may not give any pleasure to the consumer, e.g., medicine or an injection. An injection or medicinal tablet gives no pleasure, but it is necessary for the patient.

12. 8- Utility is also Distinct from Satisfaction Utility and satisfaction, both are though inter-related but they have not been considered as the same in a strict sense.

13. Different Types of Utility w.r.t Production In economics, production refers to the creation of utilities in several ways. Thus, there are following types of utility w.r.t production : 1. Form Utility. 2. Place Utility. 3. Time Utility. 4. Service Utility.

14. 1. Form Utility This utility is created by changing the form or shape of the materials. For example—A cabinet turned out from steel furniture made of wood and so on. Basically, form utility is created by the manufacturing of goods .

15. 2. Place Utility This utility is created by transporting goods from one place to another. Thus, in marketing goods from the factory to the market place, place utility is created. Similarly, when food-grains are shifted from farms to the city market by the grain merchants, place utility is created. Place utility of a commodity is always more in an area of scarcity than in an area of abundance. For Example, Kashmir apples are more popular and fetch higher prices in Pune than in Srinagar on account of such place utility.

16. 3. Time Utility Storing, hoarding and preserving certain goods over a period of time may lead to the creation of time utility for such goods. For Example, by hoarding or storing food grains at the time of a bumper harvest and releasing their stocks for sale at the time of scarcity, traders derive the advantage of time utility and thereby fetch higher prices for food-grains.

17. 4. Service Utility This utility is created in rendering personal services to the customers by various professionals, such as lawyers, doctors, teachers, bankers, actors etc.

18. Types of Utility w.r.t Unit of Consumption This category has three following types: ( i ) Marginal Utility. (ii) Total Utility. (iii) Average Utility.

19. ( i ) Marginal Utility Marginal utility is the utility derived from the last or marginal unit of consumption. It has been said—as the last unit in the given total stock of a commodity. 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.”

20. Continued… For Example, Suppose Mr. Shanker 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 we will consume only four bread then the marginal unit will be fourth bread and utility will be 8.

21. Kinds of Marginal Utility Marginal utility is of three kinds: (a) Positive Marginal Utility. (b) Zero Marginal Utility. (c) Negative Marginal Utility.

22. Continued… It is a matter of general experience that if a man is consuming a particular goods, then receiving of next unit of goods reduces the utilities of the goods and ultimately a situation comes when the utility given by the goods become zero and if the use of the goods still continues, then the next unit will give dis-utility. In other words it can be said that we will derive “negative utility”.

23. Continued… This can be studied better by the following table:

24. Continued… From the table given above it is clear that up to the consumption of the fifth bread we receive positive utility. 6th unit is the unit of full satisfaction i.e., Utility derive from that unit is zero. From 7th unit the utility received will be negative utility. The table can be represented in shape of diagram as follows:

25. Continued… In diagram, OX axis shows unit of bread and OY axis shows the Marginal Utility received. From the figure it is clear that from the first unit of bread utility received are 20 which has been shown on the top of the line.

26. Continued… Similarly 2, 3, 4, 5 Unit of bread’s utility is 16, 12, 8, 4 respectively. All these have been shown on OX line which shows positive marginal utility. Utility of the sixth bread is zero. And that of the seventh bread is negative and negative rectangle has been shown below OX line.

27. (ii) Total Utility Total Utility is the utility from all units of consumption. According to Mayers, ”Total Utility is the sum of the marginal utilities associated with the consumption of the successive units.” Suppose, a man consumes five breads at a time. He derives from first bread 20 units of satisfaction from second 16, from third 12, from fourth 8 and from fifth 4 i.e., total 60 units.

28. Continued… This can be shown by the following table:

29. (iii) Average Utility Average Utility is that utility in which the total unit of consumption of goods is divided by number of Total Units. The Quotient is known as Average Utility. For example, If the total Utility of 4 bread is 40 then the average utility of 4 bread will be 10 (40 ÷ 10= 4), similarly the average utility of 3 bread will be 12 if the total Utility of 3 bread is 36 i.e., (36 ÷ 3 = 12).

30. Continued… It is clear from the above table that by the increasing use of any article Marginal and Average Utility reduces gradually and Total Utility increases only up to that point where the Marginal Utility comes to zero.

31. Relation between Total Utility and Marginal Utility ( i ) When Marginal Utility is reducing, the Total Utility will increase so long Marginal Utility does not become zero. (ii) When Marginal Utility becomes zero; Total Utility will be maximum. (iii) After zero when Marginal Utility is negative then there is reduction in Total Utility.

32. Continued… Relationship between Marginal Utility and Total Utility can be studied from the following :

33. Continued… From the above table it is clear that up to fourth bread Marginal Utility is positive and there is no regular increase in the Total Utility. And on fifth bread the Marginal Utility is zero and on this point the increase in Total Utility stops. This is point of safety, As Prof. Bounding has said that “Point of full satisfaction and point of full safety is that point where consumption increases but there is no increase in Total Utility.” If after fifth bread, extra bread is consumed then there will be dis-utility and Marginal Utility will be negative. Sixth and seventh bread shows dis-utility.

34. Thank you!!!