Total Utility

Economics

What is Total Utility in Economics?

Total utility refers to the aggregate amount of fulfilment or satisfaction received from the consumption of a specific good or service. There is another form of utility known as a marginal utility which is the satisfaction derived from consuming one additional good or service.

In economics, total utility is often expressed as the quantifiable summation of happiness or satisfaction obtained from consuming multiple products or services. It is part of consumer behavior in a given market. There are special calculations involved in determining the total utility of a good or service.

Total utility is an important factor in determining the marketplace supply and demand. Economists use various tools to determine supply and demand by evaluating the total utility of goods and services.

Consumer behavior in the market is tested by marginal increases or marginal decreases by economists. In the case of total utility, marginal changes refer to the growing or diminishing levels of utility obtained from additional consumption.

Total utility is often compared with marginal utility, another form of utility that considers additional consumption of goods and services. In simple terms, total utility is the added sum of all marginal utilities until the consumption of the last item.

Types of Utility: Total Utility and Marginal Utility

As mentioned above, utility is the satisfaction derived from the consumption of a product. Total utility and marginal utility together can be great tools to enhance the marketing of products. As total utility expresses the satisfaction levels of goods and services, companies can improve their product offering based on the total utility of the products.

  • Total utility is the amount of satisfaction obtained from consuming a given total amount of a good or service.

    Marginal utility is the additional quantity of satisfaction derived by consuming one additional product or service.

    Economists divide the total utility into units known as utils. It is the unit of satisfaction a person would get by consuming a unit amount of a good or service.

  • In the case of total utility, economists can measure the utility from one to multiple units.

    For example, ice cream provides a level of utility from its singular consumption. However, many scoops of an ice cream box may provide total utility over the course of time it takes to completely end consuming all the ice cream scoops in the box.

    On the other hand, the marginal utility will refer to the satisfaction one will get by consuming an additional scoop of ice cream.

    The first scoop in this case will provide the highest satisfaction and the satisfaction level will go on diminishing as additional scoops are consumed. The marginal utility may be zero at some point meaning that the person won’t get any satisfaction by consuming another scoop of ice cream.

  • The marginal utility can also become negative meaning that the person will actually be dissatisfied by consuming an additional amount. The total utility starts to decline when marginal utility becomes negative but it cannot reach a negative level like a marginal utility.

  • It must be finally noted that the total utility is maximized when the last rupee spent equals or goes above the marginal utility of any other additional purchase that could have been made.

Key Assumptions About Utility

In the utility theory, there are four basic assumptions. These are as follows:

  • Completeness: For the set of preferences A and B, set A is considered complete if the set is preferred to set B, set B is preferred to set A, or set A and B are equally preferred. It means that in the case of preferences while measuring the utility, there should be no ambiguity if the outcomes have to be complete. In other words, utility is termed to be complete when the sense of satisfaction of a person with two sets of goods is clear and unambiguous.

  • Monotonicity: Monotonicity of preferences is a common assumption in economics. It states that any increase in consumption is welcomed by the consumer, irrespective of the reference consumption set. This can also be stated by the expression “more is always better.”

    Monotonicity is central to human behavior because people always consider that availability of more of their needful products is better than the scarcity of them.

  • Mix is better: The mix is better assumption states that out of the two bundles, the mix of the two will be preferred to stand-alone choices of each. For example, a healthy drink containing milk and nutritional powder will be better than milk or a nutritious drink alone.

  • Transitivity: The assumption of transitivity states that if set A is preferred to set B, and set B is preferred to set C, then set A will automatically be preferred to set C.

Conclusion

Apart from economics, the total utility can be used in studies of marketing, psychology, philosophy, and human behaviors. By applying and using data obtained from total utility studies, many fields of human endeavor can get insights into the supply and demand of goods and services for a given market or society.

Therefore, it is of central importance to economists as a disbalance may wreak havoc in providing extremely needed goods in a market. Total utility is, therefore, a very useful topic that keeps the individuals, communities, and markets running without any bottleneck.

FAQs

Qns 1. What is the link between total utility and marginal utility?

Ans. The total utility of a good or service can be obtained by adding the marginal utilities of all additional goods till the last set of consumption. That is, the total utility can be obtained if the marginal utilities of all sets of consumption are known.

Qns 2. What is the difference observed between total and marginal utilities with increasing consumption?

Ans. The difference between total and marginal utility with increasing consumption is that total utility increases but marginal utility diminishes with additional consumption.

Qns 3. What is Marshall’s theory of Total utility?

Ans. According to Marshall, the concept of utility is cardinal. The amount of money a purchaser wants to pay for a product shows the utility of the product for that person. Total utility is the sum of all utilities which a consumer derives from the consumption of different units of goods.

Qns 4. What is the unit of measuring utility?

Ans. The unit of measuring utility is util. It is a qualitative unit that shows the levels of satisfaction derived by consuming a good or service.

Qns 5. Why is the concept of total utility important?

Ans. The concept of total utility is important because it is related to consumer behavior. If the consumer choices which are dependent on total utility are known, then consumer behavior can be obtained in favor of many businesses and organizations.

raja
Updated on 13-Oct-2022 11:19:47

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