What is Utility

Usefulness is the simplest term that can define “Utility.” However, in economics, utility is referred as the amount of satisfaction derived from consuming certain goods or services.  Utility directly affects the demand and supply of a product, and the concept can be explained with two perspectives—product’s perspective and consumer’s perspective. The capability of a product in satisfying the want is what utility is from a product’s perspective where as psychological feeling of happiness, pleasure and well-being is utility from a consumer’s perspective. Although difficult to measure, the consumer’s utility can be determined with the help of consumer behavioral theories that works on the assumption that consumers endeavor for maximum utility.

Application of Utility

The application of utility is driving the economy. The application is applied by economists with a combination of commodities that the consumers maintain in a given period. The combination of production and commodity constraints can be used to analyze the value of utility function and social welfare function. Such efficiency is the central idea of welfare economics. In finance, utility is applied to evaluate individual’s assets commonly termed as the indifference price. The utility is also used to determine the risk measures at any given level of growth and sustainability.

Marginal Utility

Marginal utility is each additional unit of a good or service that is consumed. Marginal utility is also used by economists to determine the consumption of goods or services. A positive marginal utility is when the total utility increases with consumption of each additional unit of a good or a service while the negative marginal utility is when the same decreases the total utility.

Total Utility

Total utility can be described as the total amount of satisfaction consumer gains out of consuming the total quantity of a good or a service. For example, if a consumer is consuming a cookie, it provides a level of total utility as derived from 1 single cookie, whereas a bag of cookies may provide total utility over a certain period since it takes time to consume the entire bag of cookies.  

Utilities Sector

The utilities sector is the group of companies involved in the distribution of electricity, water, gas and other related services. With a significant infrastructure, utility sector carries huge amounts of debts, with a high rate of responsiveness to the changes in the interest rate.

Law of Diminishing Marginal Utility

The law of Diminishing Marginal Utility indicates, “Other things remaining constant, as a person consumes each unit of a commodity, the marginal utility diminish with each successive unit.” It is described as the change in utility with each unit of consumption of a product or a service. For example, a person is hungry and decides to buy a pizza. By eating the first slice of pizza, the consumer would gain positive utility. Since the person was very hungry, he/she will derive the highest level of benefit from the first slice of pizza. On consuming the second slice of that pizza, the consumer will derive a small amount of satisfaction from that slice, since he/she is not as hungry as before. The third slice of pizza will hold a lesser amount of satisfaction as he/she is not hungry anymore. The fourth slice of pizza will experience diminishing marginal utility as it is difficult to consume because the individual may feel discomfort being full from the food. Consuming the fifth slice of pizza may result in negative utility. The five slices of pizza exhibit the decreasing utility that is experienced by the consumer upon the consumption of goods and services.