Note on Concept of Total, Marginal and Average Utility

• Note
• Things to remember

UTILITY

The utility may be defined as the power of commodity or services which satisfy the human wants. It has nothing to do with usefulness or harmfulness but simply refers to wheather the goods & services satisfy human beings or not. In economics the goods whether they are useful or not posses utility which can satisfy human wants.

Concept of Cardinal Utility:

Cardinal utility is also called traditional approach of utility analysis. According to this approach, utility can be measured in numbers. It means level of satisfaction of a consumer can be assigned in numbers. Law of satisfication of a consumer can be assigned in numbers. Law of diminishing,Marginal utility & law os substitution are the popular theories developed by using the concept of cardinal utility.

Assumption of Cardinal Unity

1. Rationality:
The consumer should be rational about consuming goods & services & try to maximize satisfaction from available limited resources.

2. Cardinal Measurement of Utility:
Under this approach, the utility is measured cardinally. Hence,  the satisfaction that consumers gets can be numerically valued.

3. Diminishing Marginal Utility:
If the consumers consume the successive units of a commodity one after another the utility devlines. Hence, the satisfication which is derived from the consumption of an extra unit of a commodity declines.

4. Budget Constraint:
It is assumed that consumer has a limited money income to spend on goods & services.

It is assumed that utilities are additive as shown below:
TU = U(n1) + U(n2) + U(n3) + ..... + U(nn).

6. Constant Marginal Utility of Money:
It is assumed that the marginal utility of money remains constant. An increase or decrease in income of the consumer doesn't change the marginal utility of money.

There are three types of utility:

1. Total utility
2. Marginal utility
3. Average utility

1) Total utility

Total utility which a consumer obtains by consuming all units of a commodity in certain time period is known as total utility. If a consumer consumes n units of commodity, total utility can be expressed as :

TU = (Un1 + Un2+ ............ Unn)

Where,

TU = Total utility

Un1 + Un2+ ............ Unn are the marginal utilities derived from 1st unit, 2nd unit, ...... nth unit respectively.

2) Marginal utility

The utility which a consumer obtains by the consuming extra units of the commodity is known as marginal utility. In other words, marginal utility is change in total utility due to change in total utility due to change in unit of consumption of the commodity.
Symbolically,
MU = $$\frac{\Delta TU}{\Delta X}$$

Where,

MU = Marginal Utility

TU = Total Utility

Δ = Change

Q = Unit of commodity

3) Average Utility:

The satisfaction joined by the consumer from per unit commodity consumed is called average utility. It is also defined as total utility divided by units of the commodity consumed.

Symbolically,

AU= TU / Q

Where,

AU = Average Utility

TU = Total Utility

Q = Unit of commodity

RELATION BETWEEN TU AND MU

The relationship between TU and MU can be explained by the help of following table and diagram:

*Note: MU and TU can be measured either in Rs. or in Utils.

From the above table, we can conclude the following relationship between TU and MU:

• TU is the summation of MU and MU is a change in TU.
• TU is always positive but MU may be positive, negative and zero.
• When MU is positive, TU increases at a diminishing rate
• When MU is zero, TU is maximum.
• When MU is negative, TU is declining.

In the above figure, units of consumption and utility are measured along the X-axis and Y-axis respectively. For each combination of units of consumption and marginal utility, we plot a point on the graph. Joining these points, we obtain a MU curve indicating marginal utility curve. It slopes downward from left to right which indicating that MU declines as a consumer consume more and more units of the same commodity. Similarly, for each combination of units of consumption and total utility we plot a point on the graph. Joining these points, we obtain a TU curve indicating total utility curve. Initially, it increases at a diminishing rate then reaches its maximum and then starts declining.

Bibliography

Adhikari, D. R., Dahal, G. D., Acharya, K. R., Lamichhane, B., & Shrestha, P. P. (2011). Economics II. Kathmandu: Asmita.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

1. Utility may be defined as the power of commodity or services which satisfies the human wants
2. Total utility is total cumulative received by a consumer from the consumption of a certain commodity or services
3. Marginal utility is the additional utility that a consumer get from the consumption of extra one units of the commodity
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