Meaning and Features of Utility

Utility Analysis forms the starting point of microeconomics in the Std XII Economics course, because it explains why a consumer is willing to pay for a good in the first place. In everyday speech "utility" simply means usefulness, but in Economics the word has a sharper, technical meaning.

Utility is the want-satisfying power of a good or service — the satisfaction, actual or expected, that a consumer derives from consuming it. A student's textbook has utility because it satisfies the want for knowledge; a fan has utility because it satisfies the want for coolness in Maharashtra's hot summer months. Utility is the psychological basis on which the whole theory of demand in this MSBSHSE Class 12 Economics syllabus is built — a consumer buys a good only because it possesses utility for that consumer.

Features of Utility. The Maharashtra HSC (MSBSHSE) Economics syllabus expects a Std XII student to know the following distinguishing features of utility:

1. Utility is subjective. It depends on the mental state, taste and preference of the person consuming the good — the same cup of tea gives high utility to a tea-lover and none at all to someone who dislikes tea.
2. Utility is relative. It varies from person to person, from place to place, and from time to time for the same person — an umbrella has high utility during the monsoon in Mumbai but almost none in the middle of a dry, hot April.
3. Utility is ethically neutral. Utility is not the same as usefulness, morality or social approval. A packet of cigarettes has real utility for a smoker even though it is medically harmful — Economics measures only want-satisfying power, not whether that want should be satisfied.
4. Utility is intangible. It cannot be seen, touched or physically measured the way weight or length can — it can only be inferred from a consumer's behaviour or expressed through a hypothetical psychological unit called a "util."
5. Utility need not be useful in the ordinary sense. A good may satisfy a harmful or wasteful want and still possess utility in the economic sense, precisely because of feature (3) above.
6. Utility can be unstable and can even become zero or negative. As explained fully in Section 3, the utility from successive units of the same good, consumed one after another in a given period, does not stay constant — it typically diminishes, can fall to zero, and can even turn negative (disutility) if consumption is pushed too far.
7. Utility differs from satisfaction. Utility is the want-satisfying capacity a good possesses before it is consumed (an expectation), while satisfaction is what is actually felt after consumption — the two can differ, for example, when a meal that promised great utility disappoints in the eating.

Because utility is subjective and cannot be measured on an objective scale the way price or weight can be, the classical economists who built this theory — chiefly Alfred Marshall — made a simplifying assumption: that utility can be measured cardinally, in imaginary numerical units called utils, in the same way that temperature is measured in degrees. This assumption, called the Cardinal Utility Approach, underlies everything covered in this chapter and is examined critically in Section 5.