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Utility F.Y

Utility refers to the ability of a good or service to satisfy human wants. There are several types of utility: 1) Form utility - created by changing the form or shape of materials 2) Place utility - created by transporting goods from one place to another 3) Time utility - created by storing goods over time Utility has characteristics such as being psychological, individual, and relative. It cannot be objectively measured but rather assessed ordinally as more or less. Limitations of utility analysis include its assumptions that utility is cardinally measurable and that utilities are independent, failing to fully explain substitution and income effects.

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151 views4 pages

Utility F.Y

Utility refers to the ability of a good or service to satisfy human wants. There are several types of utility: 1) Form utility - created by changing the form or shape of materials 2) Place utility - created by transporting goods from one place to another 3) Time utility - created by storing goods over time Utility has characteristics such as being psychological, individual, and relative. It cannot be objectively measured but rather assessed ordinally as more or less. Limitations of utility analysis include its assumptions that utility is cardinally measurable and that utilities are independent, failing to fully explain substitution and income effects.

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Que-8 Define Utility. Write a detailed note on Utility.

OR Discuss Features, Types and


Limitations of Utility analysis.
(A) Meaning of Utility:
The simple meaning of ‘utility’ is ‘usefulness’. In economics utility is the capacity of a
commodity to satisfy human wants.
Utility is the quality in goods to satisfy human wants. Thus, it is said that “Wants satisfying
power of the commodity is known as Utility.”
(B) Definition of Utility:
1. According to Prof. Waugh:
“Utility is the power of commodity to satisfy human wants.”
2. According to Fraser:
“On the whole in recent years the wider definition is preferred and utility is identified, with
desireness rather than with satisfyingness.”
(C) Characteristics of Utility:
The following are the important characteristic features of utility:
1. Utility has no Ethical or Moral Significance:
A commodity which satisfies any type of want, whether moral or immoral, socially desirable or
undesirable, has utility, i.e., a knife has utility as a household appliance to a housewife, but it has
also a utility to a killer for stabbing some body.
2. Utility is Psychological:
Utility of a commodity depends on a consumer’s mental attitude and assessment regarding its
power to satisfy his particular want. Thus, utility of a commodity may differ from person to
person. Psychologically, every consumer has his likes and dislikes and everyone determines his
own level of satisfaction.
For instance:
A consumer who is fond of apples may find a high utility in apples in comparison to the
consumer who has no liking for apples. Similarly a strictly vegetarian person has no utility for
mutton or chicken.
3. Utility is always Individual and Relative:
Utility of a commodity varies in different situations in relation to time and place. Even the same
consumer may derive a higher or lower utility for the same commodity at different times and
different places. For example—a person may find more utility in woolen clothes during the
winter than in summer or at Kashmir than at Mumbai.
4. Utility is not Necessarily Equated with Usefulness:
Utility simply means the ability to satisfy a want. A commodity may have utility but it may not
be useful to the consumer. For instance—A cigarette has utility to the smoker but it is injurious to
his health. However, demand for a commodity depends on its utility rather than its usefulness.
Thus many commodities like opium liquor, cigarettes etc. have demand because of utility, even
though, they are harmful to human beings.
5. Utility cannot be Measured Objectively:
Utility being a subjective phenomenon or feeling of a consumer cannot be expressed in
numerical terms. So utility cannot be measured cardinally or numerically. It cannot be measured
directly in a precise manner. Professor Marshall has however, unrealistically assumed cardinal
measurement of utility in his analysis of demand.
6. Utility Depends on the Intensity of Want:
Utility is the function of intensity of want. A want which is unsatisfied and greatly intense will
imply a high utility for the commodity concerned to a person. But when a wan is satisfied in the
process of consumption it tends to experience a lesser utility of the commodity than before. Such
an experience is very common and it is described as a tendency of diminishing utility
experienced with an increase in consumption of a commodity. In other words, the more of a thing
we have, the less we want it.
7. Utility is Different from Pleasure:
A commodity may have utility but its consumption may not give any pleasure to the consumer,
e.g., medicine or an injection. An injection or medicinal tablet gives no pleasure, but it is
necessary for the patient.
8. Utility is also Distinct from Satisfaction:
Utility and satisfaction, both are though inter-related but they have not been considered as the
same in a strict sense.
(D) Different Types of Utility:
1. Form Utility: This utility is created by changing the form or shape of the materials. For
example—A cabinet turned out from steel furniture made of wood and so on. Basically, from
utility is created by the manufacturing of goods.
2. Place Utility: This utility is created by transporting goods from one place to another. Thus, in
marketing goods from the factory to the market place, place utility is created. Similarly, when
food-grains are shifted from farms to the city market by the grain merchants, place utility is
created.
Transport services are basically involved in the creation of place utility. In retail trade or
distribution services too, place utility is created. Similarly, fisheries and mining also imply the
creation of place utility. Place utility of a commodity is always more in an area of scarcity than in
an area of scarcity than in an area of abundance e.g., Kashmir apples are more popular and fetch
higher prices in Pune than in Srinagar on account of such place utility
3. Time Utility: Storing, hoarding and preserving certain goods over a period of time may lead
to the creation of time utility for such goods e.g., by hoarding or storing food-grains at the time
of a bumper harvest and releasing their stocks for sale at the time of scarcity, traders derive the
advantage of time utility and thereby fetch higher prices for food-grains. Utility of a commodity
is always more at the time of scarcity. Trading essentially involves the creation of time utility.
4. Service Utility:
This utility is created in rendering personal services to the customers by various professionals,
such as lawyers, doctors, teachers, bankers, actors etc.
(E) Kinds of Utility:
Utility are of three kinds:
(i) Marginal Utility,
(ii) Total Utility,
(iii) Average Utility
(F )Limitations of Utility Analysis:-

(i) The utility analysis assumes that utility is cardinally measurable, i.e., it can be assigned
definite numbers. But it is wrong to say that utility can be measured cardinally. Utility is
subjective and as such it cannot lie measured. We can only say whether satisfaction is more or
less. We cannot say exactly how much. That is, ordinal measurement is possible and not cardinal
measurement.
(ii) The utility analysis further assumes that utilities are independent. That is why it is said that
utility of a commodity varies with its quantity and of that commodity alone. But the fact is that
commodities are interlinked and the utility of one is influenced by that of another.

(iii) Besides, the utility analysis does not fully bring out the income effect and substitution effect
of a change in price. It is unable to explain how much of the increased demand for a commodity
is due to the income effect and how much to the substitution effect when price of the commodity
has changed. As Hicks says, "The distinction between direct and indirect effects of a price
change is accordingly left by the cardinal theory as an empty box, which is crying out to be
filled."

(iv) Also, the utility analysis assumes that the marginal utility of money remains constant as a
consumer goes on spending the money on the purchase of a commodity. This is not correct,
because as the amount of money goes on decreasing, its marginal utility must rise.

(v) Finally, the utility analysis fails to explain the demand for certain commodities which are big
and indivisible, e.g., a house, a car.

Limitations by Marshall:-
(i) Utility is personal, psychological and abstract view which cannot be measured like goods.
(ii) Utility is different for different people. Utility is always changeable and it changes according
to time and place. Therefore, it is difficult to measure such thing who is of changeable nature.
(iii) Further, measuring material ‘money is not static. Value of money always changes, therefore,
correct measurement is not possible.
In view of these shortcomings of the utility analysis, modern economists have adopted a new
technique, called the indifference curve technique, to explain consumer demand.

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