Meaning of Utility:
The want satisfying power of a commodity is called utility. It is a quality possessed by a commodity or service to satisfy human wants. Utility can also be defined as value-in-use of a commodity because the satisfaction which we get from the consumption of a commodity is its value-in-use.
Types of Utility:
Utility may take any of the following forms:
(1) Form Utility:
When utility is created and or added by changing the shape or form of goods, it is form utility. When a carpenter makes a table out of wood, he adds to the utility of wood by converting it into a more useful commodity like furniture. He has created form utility.
(2) Place Utility:
When the furniture is taken from the factory to the shop for sale, it leads to place utility. This is because it is transported from a place where it has no buyers to a place where it fetches a price.
(3) Time Utility:
When a farmer stores his wheat after harvesting for a few months and sells it when its price rises, he has created time utility and added to the value of wheat.
(4) Service Utility:
When doctors, teachers, lawyers, engineers, etc. satisfy human wants through their services, they create service utility. It is acquired through specialised knowledge and skills.
(5) Possession Utility:
Utility is also added by changing the possession of a commodity. A book on economic theory has little utility for a layman. But if it is owned by a student of economics, possession utility is created.
(6) Knowledge Utility:
When the utility of a commodity increases with the increase in knowledge about its use, it is the creation of knowledge utility through propaganda, advertisement, etc.
(7) Natural Utility:
All free goods such as water, air, sunshine, etc., possess natural utility. They have the capacity to satisfy our wants.
Characteristics of Utility:
The following are the characteristics of utility:
1. Utility and Usefulness:
Anything having utility does not mean that it is also useful. If a good possesses want satisfying power, it has utility. But the consumption of that good may be ‘useful’ or ‘harmful’. For example, the consumption of wine possesses utility for a man habitual to drinking because it satisfies his want to drink. But the use of wine is harmful for health, but it has utility. Thus utility is not usefulness.
2. Utility and Satisfaction:
Utility is the quality or power of a commodity to satisfy human wants, whereas satisfaction is the result of utility. Apples lying in the shop of a fruit seller have utility for us, but we get satisfaction only when we purchase and consume them. It means utility is present even before the actual consumption of a commodity and satisfaction is obtained only after its consumption. Utility is the cause and satisfaction is the effect or result.
3. Utility and Pleasure:
It is not necessary that a commodity processing utility also gives pleasure when we consume it. Utility is free from pain or pleasure. An injection possesses utility for a patient, because it can relieve him of his illness. But injection gives him no pleasure; instead it gives him some pain. Quinine is bitter in taste but it has the utility to treat the patient from malaria. So, there is no relationship between utility and pleasure.
4. Utility is Subjective:
Utility is a subjective and psychological concept. It means utility of a commodity differs from person to person. Opium is of great utility for a man accustomed to opium, but it has no utility for a man who is not accustomed to opium. In the same manner, utility of different commodities differs from person to person. Therefore, utility is subjective.
5. Utility is Relative:
Utility is a relative concept. A commodity may possess different utility at different times or at different places or for different persons. In olden days, a Tonga had greater utility. But now with the invention of bus, its utility has become less. A rain coat has greater utility in hilly areas during rainy season than in plain areas. A fan has greater utility in summer than in winter.
6. Utility is Abstract:
Utility is abstract which cannot be seen with eyes, or touched or felt with hands. For example, the argumentative power of an advocate is abstract. Similarly, utility is abstract. Utility of a commodity can neither be seen not touched or felt with hands.
Measurement of Utility:
According to Marshall, the utility of a commodity can be measured in terms of money. If a consumer is willing to pay Rs.2 for an orange and Re 1 for a banana, then the utility of an orange is equal to Rs.2 and that of a banana is Re. 1 to him.
It means that the utility of one orange is equal to 2 bananas. In other words, the utility of an orange to the consumer is twice that of the banana. But this analysis does not hold when there are two different consumers offering two different prices for the same commodity.
Suppose Bhanu offers Rs.2 for a banana for which Gautam is prepared to pay Re. 1.The higher price paid by Bhanu does not mean that he gets more utility and Gautam less utility. Thus money does not measure the utility from a commodity. It simply measures the intensity of our desire for a commodity. Despite this weakness, money is used as a measure of utility.
Cardinal and Ordinal Utility:
The terms ‘cardinal’ and ‘ordinal’ have been borrowed from mathematics. The numbers 1, 2, 3, 4, etc. are cardinal numbers. According to the cardinal system, the utility of a commodity is measured in units and that utility can be added, subtracted and compared. For example, if the utility of one apple is 10 units, of banana 20 units and of orange 40 units, the utility of banana are double that of apple and of orange four times the apple and twice the banana.
The ordinal numbers are 1st, 2nd, 3rd, 4th, etc. which may stand for 1, 2, 4, 6 or 30, 40, 60, 80, etc. They tell us that the consumer prefers the first to the second and the third to the second and first, and so on. But they cannot tell by how much he prefers one to the other.
The entire Marshallian utility analysis is based on the cardinal measurement of utility. According to Hicks, utility cannot be measured cardinally because utility which a commodity possesses is subjective and psychological. He, therefore, rejects the quantitative measurement of utility and measures utility ordinally in terms of the indifference curve technique.