Note on Concept of Total, Marginal and Average Utility

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  • Things to remember

UTILITY

The utility may be defined as the power of commodity or services which satisfy the human wants. It is a psychological feeling when a consumer consumes a commodity, she/he gets some benefits in the form of satisfaction which referred as a utility. Utility obtained from a commodity is not equal to all the consumer because taste and preferences are always a different people.

There are three types of utility:

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

1) Total utility

Total utility is total cumulative received by a consumer from the consumption of a certain commodity or services. In other words, Total utility is the total satisfaction received from consuming a given total quantity of a good or service. It is the sum of marginal utility which can be expressed as:

TU = (MU1 + MU2+ ............ MUn)

Where,

TU = Total utility

MU1 + MU2+ ............ MUn are the marginal utilities derived from 1st unit, 2nd unit, ...... nth unit respectively.

2) Marginal utility

Marginal utility is the additional utility that a consumer gets from the consumption of extra one units of the commodity. It is the utility derived by consuming the final units or the last units of the commodity or services. During the process of consumption of goods and services, the utility that a consumer derives from the first unit is greater than the second unit which means the extra unit of consumption of units, which can be expressed as:

MU = ΔTU / ΔQ

= TUn - TUn-1

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

RELATIONBETWEEN TU AND MU

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

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source:www.slideshare.net

*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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