Tuesday, January 3, 2017

Concept of Utility in Demand Analysis

Utility

The concept of utility can be looked upon two angles--
  1. From the commodity angle
  2. From the consumer's angle

Commodity Angle

Utility is the want-satisfying property of a commodity.

Consumer's Angle

Utility is the psychological feeling of satisfaction, pleasure, happiness or well-being which a consumer derives from the consumption, possession or the use of a commodity.

Absolute concept of want satisfying property

The concept of want-satisfying property of a commodity is 'absolute' in the sense that this property is ingrained in the commodity irrespective of whether one needs it or not. For example; a pen has its own utility irrespective of whether a person is literate or illiterate.

Absolute concept of utility is 'ethically neutral' because a commodity may satisfy a frivolous or socially immoral need. For example; alcohol, drugs or prostitution.

Relative or subjective concept of consumer's angle of utility

From a consumer's point of view, utility is a post consumption phenomenon as one derives satisfaction from a commodity only when one consumes or uses it. Utility in the sense of satisfaction is a subjective or relative concept because--
  1. A commodity need not be useful for all; cigarettes do not have any utility for non-smokers and meat has no utility for strict vegetarians.
  2. Utility of a commodity varies from person to person and from time to time; and
  3. A commodity need not have the same utility for the consumer at different points of times, at different levels of consumption and at different moods of a consumer.
In consumer analysis only the subjective concept of utility is used.

Total Utility (TU)

Total utility may be defined as the sum of the utilities derived by a consumer from the various units of goods and services he consumes. Suppose a consumer consumes four units of a commodity X, at a time and derives utility as U1, U2, U3, and U4. His total utility (TUx) from  commodity X can be measured as follows
TUx = U1+U2+U3+U4
If a consumer consumes 'n' number of commodities, his total utility, TUn, will be the sum of total utilities derived from each commodity.
For instance, if the consumption goods are X, Y, and Z and their total respective utilities are Ux, Uy, and Uz then 
TUn = Ux +Uy +Uz

Marginal Utility (MU)

Marginal utility is another most important concept used in economic analysis. Marginal utility may be  defined in a number of ways. 
It is defined as the utility derived from the marginal unit consumed. 
or 
It may also be defined as the addition to the total utility resulting from the consumption (or accumulation) of one additional unit.

Marginal utility (MU) thus refers to the change in the total utility(i.e. ΔTU) obtained from the consumption of an additional unit of a commodity.
It may be expressed as
MU = ΔTU/ΔQ
Where ΔTU = Change in Total Utility and ΔQ = Change in quantity consumed by one unit

Another way of expressing marginal utility (MU), when the number of units consumed is 'n' can be as follows
MU of nth unit = TUn - TU(n-1)
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