Concept of Utility in Economics

Topic Covered in this page

Consumer satisfaction and Utillity

A consumer is the main decision maker of the consumption pattern in the economy. A consumer is the one who buys goods and services for satisfaction of wants. The main objective of the consumer is to get maximum satisfaction from spending his income on various goods and services. This satisfaction is also considered utility. Let us learn about the concept of utility.




What is the Concept of Utility?

Utility is an economic term introduced by the noted 18th century Swiss mathematician Daniel Bernoulli referring to the total satisfaction derived from consuming a good or service. The concept of utility in economics shows the capacity of a commodity to satisfy human wants. It is the satisfying power of a commodity. Utility is the satisfaction, actual or expected, derived from the consumption of a commodity. Utility differs from person to person, place to place and time to time. When a commodity is capable of satisfying human wants, we conclude that the commodity has utility. The economic utility of a good or service is important to understand because it will directly influence the demand, and therefore price, of that good or service.




In this context, The concept of utility in economics should not be confused with its dictionary meaning. The dictionary meaning of utility is usefulness. Whereas, in economics, higher utility does not mean greater usefulness. A commodity like alcohol, may be useless and harmful to health, but it has high utility to an alcoholic. It must also be noted that utility is subjective and differs from person to person. For a thirsty person, a glass of water holds much more utility than it does to a person who is not thirsty.

Approaches to Utility to study Consumer Behaviour

There are two main approaches to utility which study consumer’s behaviour and consumer’s equilibrium –

  1. Cardinal Utility Approach
  2. Ordinal Utility Approach

Definitions of Utility 

Here are a few definitions of utility given by famous economists,

Prof. Waugh

“Utility is the power of commodity to satisfy human wants.”

Fraser

“On the whole in recent years the wider definition is preferred and utility is identified, with desireness rather than with satisfyingness.”  

Prof. Hobson

“Utility is the ability of a good to satisfy a want.”

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