Marginal Utility: Meaning and Features | Commodities | Microeconomics

In this article we will discuss about:- 1. Meaning and Definition of Marginal Utility 2. Salient Features of Marginal Utility 3. Kinds 4. Measurement.

Meaning and Definition of Marginal Utility:

Utility is defined as the want satisfying power of a commodity or service. When a commodity is consumed the want of a person is satisfied. Hence, the utility is concerned with the want satisfying power of a commodity or service. For example, a glass of water satisfies the thirst of a person.

We can say that a glass of water has a want satisfying capacity. Wine satisfies a want of a drunkard is another example of want satisfying power of a commodity or service. The utility from a commodity differs from one person to another. It means it is subjective by nature.

Utility has been defined by different economists.

Some of the definitions are given below:

(1) Prof. Alfred Marshall has defined, “The utility of a thing to a person at a time is measured by the extent to which it satisfies his wants”.

(2) According to Prof. S.E. Thomas, “So long as an article satisfies man’s some desire of body or mind, it possesses utility in the economic sense, although this may be pernicious in its effect on the consumers or on others or detrimental to the commodity generally”.

(3) Professor Nevin has defined, “In economics the expression a commodity conveys utility, means merely that some people want it, why they want it? is not the concern of economist.”

(4) Prof. Lipsey and Prof. Sticner have defined, “The satisfaction that someone receives from consuming commodities is called his utility”.

The above definitions of utility clearly reveal that want satisfying capacity or power of a commodity or service is called utility. It is not concerned with the usefulness or harmfulness of a commodity. For example, wine is harmful but it has want satisfying power of a drunkard. Hence, it has utility for a drunkard.

Salient Features of Marginal Utility:

After the analysis of definition we can infer that there are some salient features of utility as given below:

(1) Not Related with Usefulness or Welfare:

Utility is related with the want satisfying capacity or power of a commodity. It does not take into consideration whether the commodity is useful or harmful or it increases welfare or decreases welfare of the person concerned. Consumption of wine and cigarette is harmful to the consumer but they satisfy the wants and on account of their want satisfying power they have utilities. From social point of view wine is not good and it is immoral as well. But from economic point of view such goods satisfy wants. Hence, they are studied in utility analysis.

(2) Utility is Measurable:

Utility is measurable in terms of money. When a consumer is purchasing a commodity he is making sacrifice in terms of money and this sacrifice is the measurement of utility. Keeping this in view, the relative measurement of utility of two goods is also possible. Utility is based on the cardinal approach to utility wherein utility is measured in terms of money. It can be added, subtracted and multiplied as well.

(3) Utility is a Relative Term:

The concept of utility is relative and not absolute. Utility of a commodity depends on the consumer’s want and the want satisfying power of a commodity. A glass of water has more utility when a person is thirsty but when he is not thirsty the glass of water has no utility. A book of general knowledge has utility for a student who is appearing in a competitive examination but for an illiterate it has no utility.

Thus, the utility of a commodity changes with the change in the availability, quality, climate, country, economic and social environment. Hence, the concept of utility is a relative term and based on its relative importance affected by the want satisfying power.

(4) Utility is Subjective:

Utility of a commodity is determined by several factors such as mentality, nature, taste of a consumer, economic, social and religious environment, etc. Those who are non-vegetarians they will have more utility from eggs, fish, meat while vegetarians will not have utility in them. A social reformer will study the social implications of the social system and rituals and will have more utility from the books of sociology.

(5) Utility Depends on the Intensity of Want:

Utility of a commodity depends on the intensity of a want. If a commodity satisfies a want of a consumer immediately, it will have more utility and if it satisfies the want slowly the utility is low. For example, when a person is hungry the utility from a chapati will be more. Hence, utility is the expression of desire and mentality of a consumer.

(6) Utility is Concerned with Consumer Goods Only:

The direct satisfaction of a want involves the use of a commodity and it gives utility. Indirect satisfaction of a want does not deal with utility. Utility is concerned with consumer goods because they directly satisfy the human wants and it is not concerned with the consumption of productive goods.

For example, cooking gas is used for preparing meal but it is productive which does not give direct satisfaction to a consumer. Hence, productive goods are not studied under the consumption.

(7) Utility Does not Mean Actual Consumption:

There is a difference between utility and satisfaction. When a consumer purchases a commodity he expects that he will get so much of utility but when he actually consumes the same commodity he will get the satisfaction. Before the consumption of a commodity which is calculated by the consumer is expected utility while the utility a consumer derives after the consumption of that commodity is called realised utility or satisfaction. Consumer behaviour studies both types of utility.

(8) Utility has No Physical Shape:

Utility depends on the mental state of a consumer. It cannot be expressed in physical terms. It is realised by the consumer. It cannot be touched. For example, an orange gives satisfaction to Mr. Mohan but it depends on the mental state of Mohan and not giving him a physical shape. Utility is a psychological concept which differs from person to person and situation to situation.

(9) Marginal Utility of Money Remains Constant:

Money is the measuring rod of utility. The sacrifice made by a consumer to get a commodity is the basis of its measurement. In utility analysis measuring rod of money is an essential tool. It is assumed that the marginal utility of money remains constant.

(10) Rationality of the Consumer:

The utility is based on the rationality of individual consumer. It is assumed that consumer will behave rationally in all situations and tries to maximise his utility with his given resources which have alternative uses (money income).

Kinds of Marginal Utility:

Utility is concerned with the want satisfying power of a commodity.

Utility is of three kinds as given below:

(1) Total Utility (TU).

(2) Marginal Utility (MU).

(3) Average Utility (AU).

(1) Total Utility:

The total utility is nothing but the utility derived from the consumption of all units of a commodity. In other words, it is the summation of all marginal utilities derived from the consumption of different units of a commodity. According to Prof. A.L. Meyers, “Total utility is the amount of satisfaction derived from the consumption or possession of a good. It is the sum of marginal utilities associated with the consumption of the successive units.” Hence, the total utility is the summation of all utilities derived from all the units of a commodity by a consumer.

For example, Mr. Ram buys five oranges and he gets utility from each unit as given below:

15 + 12 + 10 + 8 + 7 = 52

Thus, the total utility will be 52 units.

(2) Marginal Utility:

Marginal utility is the addition to total utility by consuming an additional unit of a commodity. It is the satisfaction derived from the additional unit of a commodity by the consumer. In other words, if we deduct one unit of a commodity from the consumption and the change in total utility on account of it is called marginal utility.

According to Prof. K.E. Boulding, “The marginal utility of any quantity of commodity is the increase in total utility which results from a unit increase in consumption”. Prof. Kirzer has also defined it, “Marginal utility refers to the rate at which total utility changes as the size, stock of the commodity changes”.

On the basis of these definitions we can say that marginal utility is nothing but the addition to total utility due to one unit change in consumption of a commodity by a consumer. For example, when a consumer increases the consumption of oranges from first unit to second the total utility increases from 10 to 18, the marginal utility would be 18 -10 = 8 which is the utility derived from the additional unit of orange.

The marginal utility can be calculated on the basis of the following formula:

where MU_X is the marginal utility of X commodity, ΔTU_X is the change in total utility of commodity X and ΔQS_X is the change in consumption of commodity X.

(3) Average Utility:

Average utility is the utility derived by dividing the number of units of a commodity to the total utility derived by the consumer.

It can be calculated on the basis of the following formula:

Relationship between Total Utility and Marginal Utility:

There is a close relationship between total utility and marginal utility because the summation of marginal utilities is the total utility derived from various units of a commodity.

This relationship can be studied from the following table:

The table reveals that:

(1) TU increases at increasing rate in the beginning up to the consumption of second unit of apple.

(2) TU increases at decreasing rate from the third unit of apple.

(3) TU reaches at its maximum with the fourth unit of apple.

(4) TU remains constant with the fifth unit of apple.

(5) TU decreases after the consumption of 6th unit of apple.

In case of marginal utility (MU) the table reveals that:

(1) MU decreases in the beginning but it is positive up to the consumption of 4th unit of apple.

(2) MU is zero with the consumption of 5th unit of apple. It is the saturation point.

(3) MU is negative with the consumption of 6th unit of apple.

The relationship of TU and MU can be converted into the form of a diagram as given below:

The diagram shows that with the increase in TU the MU is decreasing but it is positive. When TU is at its maximum and constant MU is zero. This is the point of saturation and the consumer should stop the consumption of additional unit of apple. When TU is decreasing the MU is negative, which is disutility situation.

Measurement of Marginal Utility:

Utility is the want satisfying power of a commodity. It is a psychological and subjective concept which is not concerned with the ethics or morality. On account of such characteristic utility cannot be easily measured. It cannot be directly measured. Indirect measurement of utility is possible.

Economists have suggested two methods for the measurement of utility. They are also called two approaches to utility analysis.

They are as given below:

(1) Cardinal approach to utility.

(2) Ordinal approach to utility.

(1) Cardinal Approach to Utility:

According to cardinal approach to utility, while purchasing a commodity, a consumer has to sacrifice in terms of money and his sacrifice is the measuring rod of utility. Marshall and other neo-classical economists have developed and advocated this approach to utility. Money is the measuring rod of utility. Higher the utility higher will be the sacrifice from the consumer in terms of money.

When a stock of commodity increases the additional units will give less and less utility and naturally the consumer would like to sacrifice less and less in terms of money. Thus, the utility from a commodity and its various units derived by a consumer is measured in terms of money.

For example, Mr. Ram is willing to pay Rs. 8 for commodity X, Rs. 6 for commodity Y and Rs. 4 for commodity Z, then we can say that commodity X has more utility than commodity Y and commodity Y has more utility than commodity Z which can be expressed as given below:

X > Y > Z

Professor C.S. Bar la has rightly pointed out, “Measurability of utility was a cornerstone of the Marshallian analysis of consumer behaviour”.

The method of measuring utility in terms is called cardinal approach. We can measure the utility in terms of money. Utility can be added, subtracted and multiplied with the help of this method in cardinal numbers like 1, 2, 3, 4 and so on.

(2) Ordinal Approach to Utility:

According to ordinal economists like J.R. Hicks, R.G.D. Allen, F.Y. Edgworth and Vilfredo Pareto utility is not cardinally measurable and it can be measured in ordinal numbers like I, II, III and so on.

These economists put forward the following arguments against the cardinal measurement of utility:

(i) Utility is a psychological and subjective concept which cannot be measured.

(ii) The mental state and attitude of each individual go under change according to time, country and circumstances. Utility also goes under change frequently. Hence, utility is not measureable as pointed by modern economists.

(iii) “The measuring rod of utility, as put forward by Prof. Alfred Marshall, is money which is not a stable and exact measurement as we find in case of natural and physical sciences.”

According to ordinal approach to utility we can put the utility derived from different commodities in order of preference and comparison can be made. The first preference to the commodity giving the highest utility and second and third preferences to those commodities giving less utility. On the basis of such scale of preference the new analysis for the measurement of utility, namely, ordinal utility approach has been propounded and it is based on indifference curve analysis.

The cardinal utility approach has been replaced by the ordinal utility approach. However, the cardinal utility has its importance and several laws of economics are based on it.