CONCEPTS OF UTILITY

They include the following:-

1. Total Utility.
2. Average Utility.
3. Marginal Utility.

1) Total Utility

It is the total amount of utility which a consumer derives (obtains or gets) from consuming many units of a commodity at a particular time. Total utility increases as one consumes more and more units of a commodity. it increases up to the point of satiety greatest level of satisfaction and thereafter it starts to decline as illustrated in figure 1.

Table 1: shows TU, AU, MU and level of utility maximization.

Note: Either TU or MU can be determined if any of them is given. The sum of MUs (all previous MUs) gives TU at that level of consumption. For example, at the level of consumption of 3 bottles, TU is 18 which is equal to the sum of previous MUs (8+ 6 +4).

2) Average Utility

1. “It is the satisfaction per unit of a commodity consumed”.
2. It is the total utility (derived form units of a commodity consumed) divided by the number of units consumed.

Its Calculation

Average utility (AU) is calculated with the following formula:-

From the utility schedule, when the quantity of water consumed is two bottles, total utility is fourteen units.

Therefore, AU = 14/2 = 7 units

Average utility curve and Marginal utility curve are represented in figures 2 and 3 respectively.

3) Marginal Utility

1. “It is additional satisfaction a consumer derives from consumption of one more unit of a commodity”.
2. Marginal utility is a change in total satisfaction as a result of consuming a little more or a little less of a commodity.

Thus marginal utility is either additional utility derived from the consumption of an extra unit of a commodity, or a reduction in total utility as a result of giving up a little less of the commodity. And marginal utility decreases as person possesses more of a commodity; and it increases as one gives up a little amount of the commodity.

Its Calculation

Marginal utility is calculated with the following formula:

MU = TU2 – TU1

TU2 refers to the present total utility, TU1 refers to the preceding (previous) total utility. The difference between the two gives marginal utility.

For example, in table 1, the total utility of taking two bottles of water is 14 units and total utility of three bottles is 18 units. Thus the marginal utility (additional. satisfaction) of taking the third bottle is

(18 – 14) 4 units. And for clarity purpose, it is calculated as follows:

TU2 = 18.

TUI = 14.

Therefore, MU = TU2 – TU1 = 18 – 14 = 4 Units. See column 3 (MU column) in table 1.

Relationship between TU, AU AND MU

Initially, they are all (TU, AU and MU are) equal when a consumer consumes only one unit. As he consumes additional unit (second unit) TU rises, while both AU and MU decreases. MU curve lies below AU curve because the extra satisfaction he derives from additional unit is less than the average satisfaction of all the units consumed.

When MU is at zero, TU is at the maximum point – point of satiety (saturation); and AU decreases at a rate lower than MU. Hence MU reaches zero before AU. TU declines and AU gradually approaches zero and MU begins to have negative value (-1, – 2, – 3) as illustrated in the diagram, figure 4 above.

A consumer stops consuming more of the commodity at the point of maximum total utility (point of saturation) – the sixth bottle. If he goes beyond this point (even though the commodity is free e.g. water) there will be negative effect (constipation). Thus total utility declines; and marginal utility becomes negative.

We recall that at the initial state of consumption (1 bottle), total utility (TU), average utility (AU) and marginal utility (MU) are equal. Why, Through mathematical approach at one bottle:

TU = 8.

AU = 8/1 = 8.

and MU = 8 – 0 = 8.

There will be a change in the three concepts if there is additional consumption, like taking a second bottle. Total utility will rise but marginal utility and average utility will decline.