Meaning of Utility
The term utility refers to the want satisfying capacity of a commodity or service. In another word, utility deals with the pleasure or satisfaction that individuals get from their economic activity. When a person has a desire for a commodity or for a service and if he contracts it and consumes it, his desire is pleased. Here the desire is contented due to the want filling ability of that commodity or service. Thus, the utility is the wants satisfying power existing in the goods or services or the desire fulfillment capacity of the commodities. The article discusses the basics of utility analysis.
The concept of utility was introduced by the British Philosopher Jeremy Bentham in 1989. Later, British economist William Stanley Jevons and the Austrian economist Carl Menger and the French-Swiss economist Leon Walras extended this concept. In an ordinary sense utility is usefulness but in economics, the utility differs from usefulness. Usefulness is related to human welfare but utility is only related to satisfaction of fulfillment of want. For example, the consumption of a bottle of wine fulfills the want of an individual but he cannot get welfare from the consumption of wine. It is the power of goods and services to satisfy human wants. The utility is essentially a subjective or introspective concept. The utility is related to the inner sentiment and emotions of a consumer. It has no mental and physical existence.
Sometimes, a commodity may be bad or harmful. Even then it will posse’s utility if it satisfies a human wants and if some people are set to pay a price for it. For instance, cigarettes, opium, and liquor are bad for health. However, they satisfy the want of some people. Besides people are ready to pay for them. Thus, economics only sees the utility not the goodness and badness of the product.
According to Taussig, ‘Utility is that satisfaction of goods, which is received by a man at the time of its use’.
In the words of Wagh, ‘Utility is the capacity of satisfying human wants.’
Therefore, a commodity that holds want-satisfying power has utility but if it does not possess the want-satisfying capacity, it has no utility.
Meaning of Utility Analysis
It is a study of consumer behavior related to maximization of satisfaction while consuming the goods and services with his or her limited income. Consumers are assumed to be rational in the study of economic theories and principles. Consumer’s rationality is that they always attempt to maximize their utility subject to budget constraints.
Methods/Approaches to Utility Analysis
Economists are divided on whether the utility or satisfaction that a consumer derives from the consumption of goods and services can be statistically measured or not. Some economists have said yes claiming that utility can be quantified in cardinal numbers while others have said no claiming that it cannot be quantified in exact numbers but can be put into order only.
Those economists who advocated that utility can be measured in mathematical numbers belong to cardinal utility analysis. According to cardinal utility analysis (classical economists), the utility can be expressed in terms of quantitative numbers. On the other side, those economists who advocated that the utility can not be measured in statistical numbers belong to ordinal utility analysis. According to ordinal utility analysis, the utility cannot be measured in terms of number but is presented in order of rank. The difference between cardinal and ordinal utility is essential to have a clear understanding of utility analysis, the numbers 1,2,3,4, etc., and the cardinal number and numbers 1st, 2nd, 3rd, 4th, etc. are the ordinal numbers.