Cardinal Utility Approach
Utility is a property common to all commodities and services desired by a person. It has no physical or material existence and so it is not inherent in a commodity. As long as a commodity has some use i.e. a capacity to satisfy consumer want, it has utility. Thus utility can be defined as the want satisfying power of the commodity. It relates to inner sentiments and emotions and resides in the mind of the consumer. Utility is subjective in nature.
Utility is not usefulness. Alcohol may be harmful for health, but, it is paid for since it possesses utility. Concept of utility is legally, morally, socially and ethically neutral. Utility is expected satisfaction and satisfaction is realised utility. When a consumer plans the purchase of a commodity he actually compares the price he is going to pay and the utility he is expecting from it. Utility can exist without consumption but satisfaction will necessarily come only after actual consumption. However for most of the goods expected satisfaction is nearly same as realized satisfaction hence utility & satisfaction are mostly used synonymously.
Measurement of Utility
The nineteenth century economists believed that utility was measurable just as the weight, height and temperature of objects. The consumer was assumed to possess a cardinal measure of utility. In this approach, utility is considered to be objectively measurable. A psychological unity of measuring utility was used called “Util”.
Because util can not be taken as a standard unit for measurement, as it will vary from individual to individual, hence Marshall suggested the measurement of utility in terms of monetary units.
Marginal Utility is the utility of last unit or the addition to total utility by the consumption of one additional unit of the commodity for example the total utility of consuming ten units of some commodity is the total satisfaction that those ten units provide. The marginal utility of the tenth units consumed is the satisfaction added by the consumption of that unit. It is the difference in total utility between consumption of ten units and nine units.
Mu10 = Tu10 – Tu9 or In general
Mun = Tun – Tun-1
Where Mun is the marginal utility of nth unity. Tun = Total utility of ‘n’ units. Tu n-1 = Total utility of (n-1) units.
Marginal utility can also be defined as increase in total utility (∆Tu), when the quantity of the commodity is increased by a small amount (∆Q).
Mu = ∆Tu ∆Q
When change in quantity of the commodity is 1, the above formula reduces to Mu = ∆Tu
Or Mun = tun – Tun-1
Initially marginal utility of a commodity is positive due to a feeling of an urge for the commodity. However as the process of consumption is continued, a point of saturation is reached. Consequently, marginal utility becomes zero. Thereafter marginal utility will become negative.