Utility, in general, means the usefulness of a good or service. In the Economics context, utility is more precisely defined as the satisfaction – actual or expected – that a consumer derives from using or purchasing a commodity.
In recent practice, utility is represented primarily in numerical value. In the 1300s and 1400s, Spanish economists considered only the qualitative usefulness of commodities, which would allow them to determine the prices for various goods and services. This concept went through multiple phases of change, from ordinal model to cardinal model.
These economic theories concerning utility combined with the assumption that every rational consumer would strive to maximise his/her utility from a particular product, thus, form the basis for determining demand and consequently their price.
There are three ways utility is expressed in Economics – total utility, average utility, and marginal utility. The difference between total utility and marginal utility alongside their corresponding relationship are crucial topics in senior secondary Economics and requires an in-depth understanding of their intricacies.
Therefore, prior to beginning with distinctions between these two ideas of utility, it is quintessential to learn about those individually.
What is Total Utility?
Total utility (TU) is the whole amount of fulfilment that a consumer derives from the consumption or purchase of multiple units of a particular commodity, within his/her fixed income level and budget.
A total utility example would be, one unit of a chocolate bar provides you with a utility of 10 utils; on the 2ndunit you receive 8 utils worth of satisfaction; the 3rd unit provides a utility of 5 utils. Therefore, TU you derived from the consumption of three chocolate bars is 23 utils (10 + 8 + 5).
Utils is the standard unit for measuring utility. It is a relative unit as utility derived from the consumption of a particular product will differ from one individual to another. For this purpose, economists suggest the usage of monetary denominations in lieu of util for more effective quantification.
What is Marginal Utility?
Marginal utility definition Economics would be the change in total utility due to the consumption of one additional unit of a commodity. In other words, it is the utility one derives from the consumption of an individual unit rather than in whole.
Hence, if considering the above example, the 10 utils from the first chocolate bar, 8 utils from the second bar, and 5 utils from the third bar can be represented as the marginal utility of that chocolate bar.
Derivation of MU is crucial to economic practice since it lends an idea about a product’s demand for an individual consumer.
A marginal utility example would help in understanding the above statement more clearly. Upon consumption of one unit of product X, you derive 20 utils of satisfaction. On to the next unit, you derive 15 utils of utility. It goes on till the 6th unit when additional utility derived from the consumption of one extra unit has come down to zero, i.e. MU = 0. A rational consumer would stop his/her consumption at this point since he/she is not deriving any extra satisfaction.
Therefore, the demand for product X for you would be 6 units. This phenomenon of gradual declination in MU is known as the law of diminishing marginal utility.
According to this law of marginal utility, the first unit would provide the highest level of utility and then as consumption increases, marginal utility declines.
What is the Difference Between Total Utility and Marginal Utility?
The primary differences between TU and MU are discussed in the table below.
However, besides their differences, it is crucial to learn about the relationship between marginal utility and total utility.
What is the Relationship Between Total Utility and Marginal utility?
The relationship between TU and MU can be properly understood through the table beneath. Here, we are assuming that the consumer is rational and expects utility from the consumption of coffee. Each unit is a cup of coffee.
We can see that both TU and MU began from the same point. However, as consumption increased, total utility continued increasing, whereas, the marginal utility kept declining in line.
On the 7th unit, when total utility is at its peak (95 utils), the marginal utility was zero therefore, implying that any additional cup of coffee from that point would result in negative MU or dissatisfaction. A rational consumer would stop his/her consumption at the 7th unit.
Thus, from the above discussion, we can encapsulate the relationship between TU and MU as noted below –
Marginal utility falls when total utility rises
MU = 0 when total utility is maximum
From a consumer’s perspective, marginal utility can be aligned with the cost of consuming a commodity. For instance, if marginal utility cost of a commodity is Rs.20 and MU derived from it is more than 20 utils (assuming Re.1 = 1 utils), then such individuals will continue his/her consumption until marginal utility of that commodity equals its price. It is also known as the consumer’s equilibrium.
While this is one topic from Economics, multiple such topics require a thorough understanding, since memorising this subject does not cut it if you want to ace your exams. For that purpose, you can refer to Vedantu’s study materials and online live classes.
1. What is The Total Utility?
It is the total expanse of satisfaction or utility a consumer derives from consuming a commodity.
2. What is Marginal Utility?
The change in the total utility due to an additional unit of a commodity consumed is called marginal utility.
3. Explain The Law of Diminishing Marginal Utility.
The law of diminishing marginal utility states that MU derived from any commodity declines with an increase in its consumption.