Utility refers to the satisfaction or value that consumers get from consuming goods or services. Economists call the satisfaction of want as a utility. It represents a measure of relative contentment. The concept is essential in explaining the law of demand.
18th-century Swiss mathematician Nicholas Bernoulli proposed it in 1713. Later, John von Neumann and Oskar Morgenstern used it in the formulation of their game theory.
The term utility also refers to companies that supply electricity, gas, water, or sewers to the community. Sometimes, telephone and cable TV bills often fall into the it because they are the standard in most households
Four types of utilities
The value of good or service arises from a change in shape, time, place, and ownership. How much value it depends on consumer perception.
Goods worth because of the shape, size, or even color. For example, the timber has higher usability when it becomes furniture. Bauxite is valuable when it turns into a motorized vehicle frame.
Goods or services become valuable because they are in the right location. Companies often change the attractiveness of a product by changing its physical location. Apartments are worth when they are in the city center rather than in the countryside. Likewise, moving and selling wheat on the market is more valuable than selling it around wheat farmers.
Goods are also valuable because they are at different times. For example, wool clothing is more useful during winter than in summer. Thus, demand for wool clothing is higher during winter than in other seasons. Likewise, a raincoat is more valuable when it rains than when it’s sunny.
Ownership means that the same goods have different values between individuals. Racquets are more valuable when tennis players have them than office workers. Trucks are more relevant to logistics companies than households.
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Theory
Satisfaction is somewhat different from usability. Basically, utility lies in the ability of goods or services to satisfy desires, not only the benefits. A commodity might be satisfying but might not be useful for consumers. For example, a cigarette has a utility for smokers because it satisfies them. But it endangers his health.
Economists develop utility theory based on individual preferences. This theory seeks to explain the behavior of individuals in consuming goods and services.
Consumer satisfaction is subjective. So, the theory assumes people can determine the order of their choices, depending on their preferences. That way, we can measure their utility. And, we call the measuring unit of utility as utils.
Total and marginal utility
Total utility is the total satisfaction that consumers get from a product. Meanwhile, marginal utility is extra satisfaction when consumers consume one more product. Mathematically, marginal is the first derivative of total utility.
In general, consumer satisfaction decreases with more consumption. Consuming one pizza can meet your’s hunger. If you buy the second pizza, satisfaction will be less than the first. When eating the third pizza, satisfaction will decrease further. In economics, this phenomenon is known as the law of diminishing marginal utility law.
Economists use marginal utility to determine how many goods consumers are willing to buy. And, diminishing marginal utility explains why the demand curve is downward sloping. Because extra satisfaction goes down, consumers will buy more goods if the price is lower.
