1. What are the features of utility?
Utility is the capacity of a commodity to satisfy human wants. In other
words utility is the want satisfying power of a commodity.
The following are the features of utility:
1.Relative concept
2.Subjective concept
3.Ethically neutral concept
4.Utility differ from usefulness 5.Utility differ from pleasure
6.Utility differ from satisfaction 7.Measurement of utility is hypothetical
8. Utility is multipurpose
9.Utility depends on the intensity of want
10.Utility is the basis of demand
Features of Utility
1.Relative Concept
Utility is related to time and place under consideration. It changes from
time to time and place to place.
Examples:
i. Aqua guard (water purifier) has more utility in the rainy season compared
to other seasons because the risk of water-borne diseases is high.
ii. A room freshener has more utility in the bathroom as compared to the
drawing room.
iii. Woolen clothes have a greater utility in the winter
iv. Sand has greater utility at the construction site than at the sea shore
(write any one example)
2.Utility is a Subjective Concept
Utility is a psychological concept. Subjective means changing from one
person to another. A product may give high utility to one person but the
same product may not give as much utility to another. It is a subjective
concept as the utility of a commodity differs from person to person on
account of differences in tastes, preferences, likes-dislikes, habits,
surroundings, age, occupation,nature etc.
For example: stethoscope has utility to a doctor but not to a layman.
3.Ethically Neutral Concept
The concept of utility does not consider whether the commodity satisfies
morally good want or bad want. A commodity can have utility even if it
satisfies bad or unethical want. Utility does not consider any moral or
ethical factors. It is morally colourless concept. In short, it is ethically
neutral.
Example: i) A gun has utility for a soldier as well as a terrorist. Their wants
are of different nature but are satisfied by the same commodity.
ii) A knife has utility to cut fruits and vegetables as well as it can be used to
harm someone.
4.Utility differs from Usefulness
Usefulness is the benefit (value-in-use) that is derived by consuming a
commodity. Whereas utility is just the want satisfying power of a
commodity.
A commodity having utility need not be useful.
Example: Alcohol has utility to a drunkard but it is not useful as it harms his
health. On the other hand, milk has utility as well as usefulness to the
consumer.
5.Utility differs from Pleasure
Utility and pleasure are different. A commodity may have utility but it is not
necessary that its consumption will give pleasure to the consumer.
Example: i)A textbook has utility for a student but he may not derive
pleasure from reading it.
ii) Injection for a patient has utility because it clear the element but it hardly
give any enjoyment or pleasure to him.
6.Utility differ from satisfaction
Utility and satisfaction are inter-related but there is a difference between
the two concepts. The difference is as follows:
i. Utility is a cause of consumption but satisfaction is the end-result of
consumption.
ii. Utility is assumed satisfaction but satisfaction is something that is
actually realised by a person through consumption.
Example: a thirsty person drinks a glass of water since water has the
capacity to satisfy thirst, water is the cause of consumption and satisfaction
is the end result of consumption
7.The Measurement of Utility is Hypothetical
Utility is an abstract concept. It is intangible and invisible in nature. It is an
inherent feeling. Therefore, it cannot be measured cardinally i.e., in
numbers.
Example: It cannot be said that “Marie” biscuit has 5 utility and “Good Day”
biscuit has 10 utility. The utility can only be experienced and found to be
either positive, zero or negative. Negative utility is called disutility.
8.Utility is Multi-purpose
A commodity can satisfy the want of more than one person. It can also be
put to several uses.
Example: Electricity and water can be used to serve many purposes for
many people at the same point of time.
9.Depends on Intensity of the Want
The utility of a commodity depends on the intensity of want. More intense
the want, greater will be the utility. As and when the urgency of the want
declines, utility diminishes.
Examples:
i. The utility of notes is higher when exams are closer as the intensity of
want for notes is intense.
ii. The utility of the fan is high when the weather is warm outside as the
intensity of want for the fan’s breeze is high.
10.Utility is the Basis of Demand
A person will demand a commodity only if it has utility for him. A person
will not demand a commodity if it does not offer any utility to him. Thus,
utility is the basis of demand.
Examples:
i. An uneducated person will not demand a book as it has no utility for him.
A student will demand a book as it has utility for him.
ii. A student pursuing Arts will not demand a calculator as it has no utility
for him. A student pursuing Commerce will demand it.
What are the various types of utility?
Ans: Utility is the capacity of a commodity to satisfy human wants. In other
words, utility is the want satisfying power of a commodity. The following are
the types of utility:
1. Form
2. Place
3.Service
4. Knowledge
5.Possession
6.Time
Types
1.FORM UTILITY
“When utility is created due to a change in the shape or form or structure of
an existing material, it is called form utility.”
The process of manufacturing or processing creates form utility.
i. When wood is changed to furniture, its utility increases.
ii. When tea leaves are processed to tea powder, its utility increases.
2.PLACE UTILITY
“When the utility of a commodity increases with a change in its place, it is
called as place utility.”
Place utility is created when goods are transferred from the place of
production to the place of consumption. Transportation helps to create
place utility.
i. The utility of Alphonso mangoes increases when they are transferred
from mango farms to various parts of the country.
ii. The utility of mobile phones increases when they are distributed from
manufacturing plants to mobile stores.
3.SERVICE UTILITY
“Service utility is created when any service is provided by a person to other
person or group of people.”
In other words, service utility arises when personal services are rendered
by various professionals.
i. Professor taking lectures in a class.
ii. An advocate giving legal advice to his clients.
4.KNOWLEDGE UTILITY
“The utility of a product increases when the user or buyer acquires
knowledge about such product. This utility is called as knowledge utility.”
Advertisements, demonstrations, user manuals etc. help the user to
acquire such knowledge.
i. The utility of a washing machine will increase when the user knows about
its operation.
ii. The utility of a computer game will increase when the player knows all its
control keys.
5.POSSESSION UTILITY
“Possession utility is created when the ownership of goods is transferred
from one person to another.:(generally seller to buyer).
i. The cakes in the ‘Ribbons and Balloons’ cake shop have utility. This utility
will increase when one places an order, pays the price and takes
possession of cake.
ii. The utility of a house will increase once the ownership is transferred from
the seller to the buyer.
6. TIME UTILITY
“When the utility of a commodity increases with a change in its time of
utilization, it is called time utility.”
Time utility is also observed when goods are stored and used at the time of
scarcity. Warehousing helps to create time utility.
i. The utility of umbrellas will increase if they are made available during the
rainy season.
ii. The utility of crackers will increase if they are distributed during the
period of Diwali.
Q. 4. What are the concepts of utility?
Ans: The want satisfying power of a commodity is called as utility. There
are two concepts of utility: Total Utility and Marginal Utility.
Utility
→ Total Utility (TU)
→ Marginal Utility (MU)
1) TOTAL UTILITY (TU)
“Total Utility (TU) refers to the aggregate utility derived by the consumer
from all units of a commodity consumed.’
In simple words, it is the sum of marginal utilities derived from successive
(back to back) consumption of units.
E.g.: If a person consumes 5 Dairy Milk chocolates, then Total Utility is the
sum total of the utilities derived from consuming all five units (one after the
other) at a point of time.
Symbolically:
TU = MU₁ + MU₂ + MU₃ + ……… + MUn
TU = Σ MU
Where,
TU = Total Utility derived from consumption of n units,
MU = Marginal Utility
2) Marginal Utility (MU)
“Marginal Utility (MU) is the additional utility derived by the consumer on
consumption of an additional unit of the commodity.”
In short, it is additional utility derived from the last unit consumed.
Example:
Suppose the consumer has already consumed 2 Dairy Milk Chocolates.
The additional utility that he derives when he consumes the 3rd chocolate
is the Marginal Utility of the 3rd unit of chocolate.
Symbolically:
MUn = TUn - TU(n-1)
Where,
MUn = Marginal Utility of nᵗʰ unit
TUn = Total Utility derived from consumption of n units
TU(n-1) = Total Utility derived from consumption of (n–1) units.
Q. Explain the relationship between MU and TU.
Ans:Total Utility (TU) refers to the aggregate utility derived by the consumer
from all units of a commodity consumed while Marginal Utility (MU) is the
additional utility derived by the consumer on consumption of an additional
unit of the commodity.
Note:
If this question is asked for 8 marks, then students need to explain the
concepts of TU and MU in detail and then continue with the answer given
below.
RELATIONSHIP BETWEEN TU AND MU
Marginal Utility (MU) derived from consumption of various units of a
commodity and its Total Utility (TU) are interrelated. This can be explained
with the help of the following example:
1) Utility Schedule
No. of chocolates TU MU
1 10 10
2 18 8 (18–10)
3 22 4 (22–18)
4 24 2 (24–22)
5 24 0 (24–24)
6 22 –2(22–24)
Explanation:
From the above schedule, it can be observed that:
i. When the first chocolate is consumed, the TU and MU are the same.
ii. As the consumer consumes more chocolates, the TU goes on increasing
(at diminishing rate) from 10 to 18 to 22 to 24, while the MU goes on
decreasing from 10 to 8 to 4 to 2. In short, TU increases at a diminishing
rate and MU goes on diminishing with the consumption of additional units
of chocolate. (TU ↑, MU ↓)
iii. After the consumption of the fourth chocolate, TU reaches its maximum
and remains constant even after the fifth chocolate is consumed, whereas
MU becomes zero. This is called the point of satiety (TU highest, MU = 0).
iv. On the consumption of the 6th unit, the Total Utility reduces from 24 to
22 and the Marginal Utility becomes negative i.e. –2 (disutility). (Here, TU
↓, MU negative)
v. After reaching the point of satiety, a rational consumer should stop his
consumption. This is because the maximum limit of satisfaction is reached
and there is no further addition to Total Utility from increase in the stock of a
commodity.
vi. Consumption beyond the point of satiety transforms satisfaction into
dissatisfaction. In other words, a consumer starts experiencing ill effects of
consumption.
Diagram
X axis represents number of units consumed and Y axis represents Total
and Marginal Utility.
Explanation:
i. TU and MU curve begin at the same point.
ii. The TU curve slopes upwards from left to right.
iii. The MU curve slopes downwards from left to right.
iv. The TU curve increases at a decreasing rate while MU curve diminishes
with additional units consumed.
v. At the point of satiety, TU curve is at the maximum point while MU is
zero.
vi. MU curve touches the X-axis.
vii. After the point of satiety, a person experiences dissatisfaction or
disutility. Hence, the MU curve becomes negative and TU curve slopes
downwards.
Explain the law of diminishing marginal utility
Introduction
Law of diminishing marginal utility was firstly proposed by Prof.Gossen in
1854 and it was explain by Prof. Alfred Marshal in his book ‘Principle of
Economics’ published in 1890.The law of DMU is a Universal in character.It
is based on the common consumer behaviour.
Statement of the law
According to Prof. Alfred Marshal,
“Other things remaining constant,the additional benefit which a person
derives from a given increase in his stock of thing, diminishes with every
increase in the stock that he already has.”
Schedule
The law of DMU can be explained with the following schedule:
No.of units Marginal Utility
1 10
2 8
3 6
4 4
5 2
6 0
7 -2
Explanation:
1) Above table shows number of unit and marginal utility.
2)When a person consume the first unit,the marginal utility is 10.
3) Marginal Utility keeps diminishes from 10 to 8 to 6 to 4 to2 with every
increase in consumption (1,2,3,4,5)
4)When 6th unit is consume,the marginal utility become zero.It’s called
‘point of maximum satisfaction’ or ‘the point of statiety’.
5) When person consume 7th unit, the marginal utility become negative(-2),
its called ‘negative utility’ or ‘disutility’.
Diagram
Explanation:
1) Unit of commodity measure on X-axis while marginal utility measure on
Y-axis.
2) Various point of marginal utility are plotted on the graph as per the given
schedule. When the locas of all the points is join marginal utility curve is
derived.
3)Marginal utilitu curve is downward from left to right.
4) When marginal utility become zero marginal utility curve cross the x-axis.
5) Further consumption of a commodity bring disutility which is shown by
the shaded portion.
Assumption
1. Rationality
2. Cardinal measurement
3. Homogeneity
4. Continuity
5. Reasonability
6. Constancy
7. Divisibility
8. Single want
1)Rationality
The law assume that consumer should be rational. It means that
his behaviour is normal and he tries to maximize his satisfaction.
2) Cardinal measurement
Utility is an abstract concept and therefore,it is not measurable
cardinally.The law DMU assume that utility can be measured
cardinally.Hence, mathematical operations are easily possible so as to
know and compare the utility derived from each unit.
3) Homogeneity
The law assume that unit of the commodity are uniform in nature It
means they are an identical in term Shape,size,colour,taste, smell etc if the
commodity being consumed is a Cadbury Dairy Milk, then all unit
consumed also should be Cadbury Dairy Milk so that all unit will be
homogeneous.The consumer can not change to Dairy Milk to Kit Kat.
4) Continuity
The law assume that all unit of commodity are consume in quick
succession without any lapse of time. if there is a time gap invconsumption
the marginal utility will not diminishes.
E.g.: if the consumer consume one unit of commodity at morning and
second unit of commodity next day in this case marginal utility will not
demishes.
5) Reasonability
It is assume that all the unit of the commodity consumed of
reasonable size. They are neither to big nor to small.
for example:A thirsty person will consume a glass of water and not Jar of
water.Similarly he will not consume water in a teaspoon.
6) Constancy
The law begin with the word “other things remaining
constant”,the assume that factor affecting the utility of commodity to remain
constant. In other word factor like a income, taste, habits, choices, likes
dislikes of a consumer are assume to be constant. Marginal Utility of
money is also constant.
7) Divisibility
The law assumes that the commodity consume by the
consumer is divisible so that it can be acquire in small quantities. These
principle holds true only for those object which can be divided into small
part.
8) Single want
The law assume that commodity is used to satisfy only a single
want.If the commodity satisfy multiple wants, the law of DMU might not
apply
The law of DMU is an extremely practical law which we experience on a
daily life.
The following are exceptions to the law of Diminishing Marginal Utility:
1) HOBBIES
A person having hobby of collecting old coins, artefacts, paintings, etc. gets
more pleasure when he collects more of it. In other words, the MU keeps
on increasing with additions to his collection. Hence, it is an exception to
the law.
However, the assumption of homogeneity is violated here as a
person does not collect the same coins or artefacts. Further, he does not
collect them in continuous succession. So, the assumption of continuity is
also violated. Hence, it is not a real exception.
2) MISER
A miser is a person who wants to accumulate more and more wealth and
does not want to spend it. Therefore, MU of money increases for a miser as
his stock of money keeps on increasing. It contradicts the law of DMU.
However, even in this case, the assumption of rationality is violated and
it cannot be considered to be a real exception.
3) ADDICTIONS
MU of alcohol keeps increasing for a drunkard as he consumes more of it.
The alcoholism increases with every additional unit consumed. This applies
to all addictions.
However, in case of all addicts, the assumption of rationality is violated
and therefore, it cannot be considered to be a real exception.
4) POWER
This is an exception to the law because when a person aquires power, his
lust for power increases. He desires to have more and more of it.
However this again violet the rationality assumption.
5) MONEY
MU of money never becomes zero. In fact, the MU of money keeps on
increasing as stock of money increases.
However, money cannot be considered to be real exception for the
following reasons:
i. Money is used as a medium of exchange to satisfy various wants. It
means it is not used to satisfy only a single want and therefore, violates
one of the basic assumptions of the law.
ii. After a certain point of time, the MU of money for a rich person reduces
as his stock of money (bank balance) keeps increasing.
According to various economists, the law of DMU is applicable to money.
Example: MU of money is more to a poor person than to a rich person.
Example: Mr. Mukesh Ambani will not tear or throw away a note of ₹10
because that note still has utility for him.
Table: Exceptions to the Law of DMU
Sr. No. Exception Violates assumption of
1 Hobbies Homogeneity and Continuity
2 MiserRationality
3 Addiction Rationality
4 Power Rationality
5 Money Single want
6 Music Homogeneity and Continuity
7 Books Homogeneity
Conclusion:
In short, all these exceptions to the law of DMU are only apparent. They
violate some or the other assumptions of the law and hence, they are not
real exceptions.
Q. What are the criticisms or limitations to the law of DMU?
Ans:According to Prof. Alfred Marshall:
“Other things remaining constant, the additional benefit which a person
derives from a given increase in his stock of a thing, diminishes with every
increase in the stock that he already has.”
The following are the criticisms or limitations to the law of DMU:
1. Cardinal Measurement is not Possible
The law assumes that utility can be expressed cardinally i.e. in numerical
terms so that it can be added, compared and presented through a
schedule. In reality, cardinal measurement of utility is not possible because
utility is a psychological concept.
2. Law does not apply to Indivisible Goods
MU can be calculated only when two or more units of a commodity are
consumed successively. Generally, a consumer will buy only one laptop or
TV or house or mobile at a time. There will not be recurring purchase of
these items at a time. Therefore, the law is not applicable to such indivisible
and bulky goods.
3. Impractical or Unrealistic Assumptions
The law is based on various assumptions like homogeneity, rationality,
constancy, continuity, etc. These assumptions are impractical and
unrealistic in nature.
4. Constant Marginal Utility of Money
The law assumes that MU of each unit of money remains constant
throughout. However, critics argue that MU of money differs from person to
person. It is influenced by changes in prices, stock of money, etc.
5. Single Want Assumption not Practical
The law assumes that one commodity is used to satisfy only a single want.
However, in reality, a person may use one commodity to satisfy many
wants at a time.
Example: Water may be used for cooking, cleaning, bathing, drinking etc.
Q. Explain the importance or significance of the law of DMU.
Ans:In spite of criticisms, the law of Diminishing Marginal Utility is a very
popular and an important law in Economics because of its universal
application.
The following is the importance or significance of the law of DMU
1) Usefulness to the Consumers
A consumer always tries to maximise his satisfaction. Therefore, the
consumer diversifies his limited resources among various commodities in
such a way that MU acquired from a commodity is at least equal to the
price.
Example: You will hesitate to pay ₹50 for a vada pav because you know
that the MU of the one vada pav is not worth ₹50.
2) Usefulness to the Government
The law is useful to the government in framing various policies such as
progressive tax policy, trade policy, pricing policy etc.
Example: Higher taxes are collected from rich people because MU of
money is less for them.
3) Basis of Paradox of Values
The law helps us to understand ‘paradox of values’ by explaining the
difference between value-in-use and value-in-exchange.
Some commodities have high value-in-use while some commodities have
high value-in-exchange.
Example: Commodities like air, water, sunshine have high value-in-use but
less or zero value-in-exchange. On the other hand, gold, diamonds, etc.
have high value-in-exchange but less or zero value-in-use.
4) Basis of Law of Demand
The law of demand is based on the law of DMU. According to the law of
demand, higher the price, lower is the quantity demanded and vice versa.
When a consumer purchases more and more units of a good, its MU
steadily declines. Hence, he would buy additional units only at a lower
price. There are always offers like “Buy 2 get 1 free” or “Pack of 3 @ ₹99”.
It mainly indicates that the consumer feels that he is deriving more utility by
paying lesser amount of money.
5) Usefulness to the Producers
The law helps the producer to fix the prices of products. Larger the stock of
the commodity, lower is the MU and hence, the producer may decide to fix
a lower price (and vice versa).
Example: The prices of “limited edition” items are kept very high because
producers have limited stock of these items.
