THEORY OF UTILITY
WHAT IS UTILITY?
Utility is a term in economics that refers to the total satisfaction received from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility. The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service. In practice, a consumer's utility is impossible to measure and quantify.
However, some economists believe that they can indirectly estimate what is the utility for an economic good or service by employing various models. utility may be defined as the support or satisfaction a person derives from the consumption of a commodity or service at any given time without any reference to its usefulness. Utility has a lot of influence on demand,however, it is not totally utility that influences demand and of course this declines the individual or processes that commodity.
CONCEPT OF TOTAL ,AVERAGE AND MARGINAL UTILITY
WHAT IS TOTAL UTILITY?
Total utility is the aggregate summation of satisfaction or fulfillment that a consumer receives through the consumption of goods or services. Total utility is usually defined as a quantifiable summation of satisfaction or happiness obtained from consuming multiple units of a particular good or service. Utility and total utility are used in economic analysis of consumer behaviors within a marketplace. Economists seek to quantify total utility using special calculations. Economists may also study several economic metrics in conjunction with total utility when seeking to understand how consumer behaviors align with supply and demand.
FORMULA FOR CALCULATING TOTAL UTILITY
Symbolically written as: TU =AU × Q Where TU = Total utility
AU = Average Utility
Q = Quantity
WHAT IS AVERAGE UTILITY?
This is the amount of satisfaction derived by a consumer per unit of a commodity consumed. It is arrived by dividing the total utility by the number of units of the commodity consumed i.e. AU = TU ÷ Q
Total, average and marginal utility are theoretical concepts. The amount of satisfaction which can be derived from a commodity cannot be measured in precise terms. It is however awesome to be measurable in units called ‘utils' its clear from the above table that by increasing the use of any article marginal and average utility reduce is gradually and total utility increases only up to that point where marginal utility comes to zero.
Marginal utility is the utility derived from the last or marginal unit of consumption. It is refers to the additional utility derived from an extra unit of the given commodity purchased, acquired or consumed by the consumer. It is the net addition to Total utility made by the utility of the additional or extra units of the commodity in its total stock. It has been said as the last unit in the given total stock or the commodity. Its symbolically written as:
MU= TU1 - TU0 ÷ Q1 - Q0
Where ∆TU = Change in total utility
∆Q = change in quantity
TU1 = new level of total utility
TU0 = Old level of the total utility
Q1 = new level of quantity
Q0 = Old level of quantity