Utility Meaning ,Definition and types

Utility Meaning ,Definition and types

In micro economics the term utility covers a major part of the discussion. So before starting micro economics study we have to clear the basis terms of economics, such as utility meaning , marginal utility, paradox of values and invisible hand of the market.

What is Utility?

Utility is a satisfaction which we derived from anything or which fulfill our needs. So everything which we consume has some satisfaction level, so we derived it. The satisfaction is called utility in economics terms.

For example, if we take a news paper read it and feed some news from it, which enhance our knowledge then news paper fulfills our needs and satisfies our wants. Here news papers have some utilities. If I do not get any type of satisfaction from any commodity, which means the utility of that commodity is zero in front of me. But it does not mean the utility of that commodity is zero in front of others. May be the commodity used and recycled and produce other things. So every thing has some utilities.

Now, how do we measure the utility? So, if we derived satisfaction from anything then we have to pay for these! Some economists had defined that utility is measurable and it is additive or subtract as per the requirements .On the other hand some economist believed that utility is not measurable ,but it will be preferred .We can preferred one bundle of commodity than the other bundle of commodities.

So utility can be measured in two ways, according to two groups of economists. That is Cardinal utility approach and Ordinal utility approach.

Must read-1) What is Economics?

2) Economic growth and Economic development

Cardinal utility approach

According to Alfred Marshall, utility is measurable and countable. According to him the margina l utility of money is constant and it is measured by a constant unit λ. Here we consider an example, suppose a consumer derived X commodity in q1 units and paid p1 price for each unit of the commodity, so total sacrifice for the particular commodity is p1q1. Now each unit of marginal utility of money is λ, so consumer sacrifice λp1q1 to get q1 units of that particular commodity X. Here if the consumer consumed q2, q3 q4 amount of X commodity, then the consumer derived U1(X1)+U2(X2)+U3(X3)+U4(X4)=U and sacrificed λ (p1q1+p2q2+p3q3+p4q4).In cardinal utility approach utility is measurable, additive and subtract.

So, U1(X1) +U2(X2) +U3(X3) +U4(X4) =U = λ (p1q1+p2q2+p3q3+p4q4).

In cardinal utility approach we assumed that marginal utility of money is constant and it is not changed. Other factors are also constant and marginal utility is diminishing in nature (i.e. the utility derived from the successive unit of a commodity is diminishing, that means if we derived more unit of any commodity utility of that commodity decreased.) On the basis cardinal measurement of utility Alfred Marshall invented the Marshallian demand curve, which is downward slopping.

The additive assumption was dropped in later versions of the cardinal utility theory. Additive implies independent utilities of the various commodities in the bundle, this assumption unrealistic for the cardinal theory.

Ordinal utility approach

In ordinal utility we cannot measure utility, we only rank them as per the satisfaction derived from these bundles. We can say that utility of bundle A is greater than the utility of bundle B. But how much we cannot say. Here ranking is matter and different utility levels are interdependent. Suppose, a consumer consumes q1 and q2 amount of X1 and X2 commodity so he /she derived U1=U1 (q1, q2) and U2= U2 (q1, q2) of utility.

Here, U= U1 (q1, q2), U2 (q1, q2)

U= f (U1, U2)

U = f (q1, q2)

In cardinal utility approach we say that utility is additive that means U1+U2+ U3+U4 =U, but here we see that utility is not additive. In ordinal utility approach transitivity play a vital role.

Let’s discuss about transitivity assumption, in ordinal utility approach if a consumer prefer bundle B than the bundle A than B is preferred bundle than the bundle A, similarly if bundle C is prefer bundle than the bundle B than C is preferred bundle than the B. In transitivity assumptions if B preferred than A and C preferred than B than it can be say that C preferred than A.

B >A, C > B, then C >A

On the basis of ordinal utility approach Jr. Hicks invented the indifference curve.

Let's take a look of some differences of cardinal and ordinal utility approaches.

Differences between Cardinal utility approach and Ordinal utility approach

Cardinal utility approach

Utility derived from the commodity is measurable and measured by utils.

Ordinal utility approach

Utility not measurable only ranked according to satisfaction derived from the commodity.

Utility is additive in nature.

Utility is not additive

Utility is not transitive

It is less practical.

Utility is transitive, according to preference

i.e. B > A, C > B, then C > A

It is more practical.

Draw Marshallian demand curve on the basis of cardinal approach.

Draw Indifference curve on the

basis of ordinal utility approach.

Cardinal utility approach invented by Prof.Marshall.

Ordinal utility approach invented by Jr.Hicks.

Example if we consume one cup of tea, utility measured 70 utils and two biscuits 50 utils. So total utility 70+50= 120 utils. On the other hand if we consume a cake its util is 60 and a chocolate 20 utils so total 60+20 =80 utils. Here add them. So, we can say that tea and biscuits give more utils than cake and chocolate.

Example, here tea and biscuits are a bundle of commodity and cake and chocolate is another bundle and consumer preferred tea and biscuit bundle more than the cake and chocolate bundle. Here we ranked bundle of commodities.

Must read in this sequence- 1) What is Economics?

2) Economic growth and Economic development