Utility: Meaning, Total and Marginal Utility

Utility is the want-satisfying power of a good or service — the satisfaction a consumer expects, or actually derives, from consuming a unit of a commodity. Utility is subjective: it differs from person to person, and from moment to moment for the same person, and it carries no moral or ethical judgement (a cigarette has utility for a smoker even though it is harmful).

Total Utility (TU) is the sum of satisfaction a consumer derives from consuming all the units of a commodity taken together. Marginal Utility (MU) is the additional utility derived from consuming one more unit of the commodity:

where $TU_n$ is total utility from $n$ units and $TU_{n-1}$ is total utility from $(n-1)$ units.

The Law of Diminishing Marginal Utility (Gossen's First Law) states that, other things remaining constant, as a consumer consumes successive units of a commodity, the marginal utility derived from each additional unit goes on falling. Total utility keeps rising as long as marginal utility is positive, reaches its maximum when marginal utility becomes zero (the point of satiety), and starts falling once marginal utility turns negative.

Assumptions of the law: the units of the commodity are identical/standard, consumption is continuous with no time gap, the consumer's tastes, income and the prices of other goods remain unchanged, and utility is assumed to be measurable in hypothetical units called utils.

Types of utility — the same commodity can gain utility in different ways:

• Form utility — created by changing the shape/form of a material (wood turned into furniture). …