Concept of Utility

In economics, utility refers to the quality of any good or service that can fulfill human needs. A consumer derives utility or satisfaction from consuming a good or service. The amount of satisfaction a consumer receives from consuming a good or service is called utility.

This is a psychological and individual concept. Generally, utility can be measured numerically. The unit for measuring utility is called utils.

Economist Alfred Marshall stated that utility can be measured based on monetary units. Utility can be further clarified based on its following characteristics:

(a) Utility depends on the intensity of the need for the good. When the intensity of the need for a good is high, the utility derived from that good is also high, and when the intensity of the need is low, the utility is also low. For example, the utility a student derives from a pen during an exam is greater than the utility they derive from the same pen after the exam is over.

(b) Utility is relative, meaning that the utility derived from the same good also varies according to the person, time, and place. For example, the utility a person gets from drinking a glass of water when they are very thirsty is greater than the utility they get from drinking water when they are not thirsty. Similarly, the utility derived from drinking that same glass of water can be different for another person.

(c) Utility is measurable, meaning that a consumer can state how much utility they derived from consuming a good.

(d) Utility does not necessarily have to be beneficial. For example, if a consumer has a habit of smoking cigarettes, they derive utility from smoking or consuming cigarettes, but smoking or consuming cigarettes is not beneficial for their health.

(e) The total utility derived from a good depends on the total units of that good consumed.

Marginal Utility

When a consumer consumes one additional unit of a good, the utility derived only from that additional unit is called the marginal utility of that unit.

In other words, the change in total utility resulting from consuming one additional unit of a good is marginal utility.

Marginal utility can be calculated in the following way:

MU_n = ΔTU / ΔQ

Where, 

MU_n = Marginal Utility 

ΔTU = Change in Total Utility 

ΔQ = Change in Quantity Consumed 

Δ represents change.

Total Utility

Total utility is the sum of the utility derived by a consumer from consuming a certain number of units of a good within a specific period.

If a consumer consumes a certain number of units of a good within a specific period, then the total utility derived by the consumer can also be taken as the sum of the marginal utility of each unit of that good. In this case,

TU_n = MU_1 + MU_2 + MU_3 + ... + MU_n

Where,

MU₁, MU₂, MU₃, and MU_n represent the marginal utility derived from the first, second, third, and nth units of the good, respectively.

TU_n = Total Utility

Example: A consumer consumes 6 units of orangess within a specific period, and they derive marginal utility of 4, 3, 2, 1, 0, and -1 from the first, second, third, fourth, fifth, and sixth units of the orangess, respectively.

Calculate the total utility derived from consuming 1, 2, 3, 4, 5, and 6 units of the orangess, respectively. Show the total and marginal utility in a table. Based on the table, construct the total utility curve and the marginal utility curve in a graph.

Solution: The total utility derived by the consumer from the first, second, third, fourth, fifth, and sixth units of oranges can be calculated as follows:

Total utility from the first unit of oranges  = 4

Total utility from the first and second units of oranges = 4 + 3 = 7

Total utility from the first, second, and third units of oranges  = 4 + 3 + 2 = 9

Total utility from the first, second, third, and fourth units of oranges  = 4 + 3 + 2 + 1 = 10

Total utility from the first, second, third, fourth, and fifth units of oranges = 4 + 3 + 2 + 1 + 0 = 10

Total utility from the first, second, third, fourth, fifth, and sixth units of oranges = 4 + 3 + 2 + 1 + 0 + (-1) = 9

Table of Total and Marginal Utility

This table illustrates the diminishing marginal utility concept, where each additional unit of consumption yields less additional satisfaction until it eventually declines.

Based on the table above, the marginal utility obtained by the consumer from the first, second, third, fourth, fifth, and sixth units of oranges is represented in the graph below by the marginal utility curve, while the total utility is represented by the total utility curve.