Utility in Economics: Meaning, Types, and Applications

A consumer is a person who usually decides his/her need for products and commodities according to the satisfaction he/she gets from it. The concept of utility in economics refers to the satisfaction a customer derives from a service or a product. Customers try their best to choose the commodities logically, to boost their utility.

Different people can experience different levels of utility from the same products. For example, a person who loves eating fast food will achieve a higher utility from a burger compared to a person who doesn’t like eating fast food. Moreover, utility also varies with time and location. For instance, the utility of a room heater is subject to whether it is used in Kashmir or Cochin, and during summer or winter. 

The commercial utility of products and services is also essential as it also influences the demand of a particular commodity and consequently, its price. Practically, consumers’ satisfaction or utility cannot be evaluated and measured. Still, some economists believe that utility of service or commercial products can be estimated using numerous models.

Apprehending Utility

Utility meaning in economics procured from the idea of usefulness. A product’s utility entirely relies on its capability to satisfy a consumer’s need or demand. There are various distinct representations of measuring the economic utility and the usefulness of a commodity or a service. It was first presented by an eminent Swiss mathematician, Daniel Bernoulli in the 18th century. From that time, the progression of economic theories has led to numerous kinds of economic utility.

Utility meaning in economics procured from the thought of usefulness. A product’s utility completely depends on its capability to satisfy consumers’ needs. There are various distinct representations of measuring the economic utility and therefore the usefulness of a commodity or a service. It had been first presented by an eminent Swiss mathematician, Bernoulli, within the 18th century. From that point, the progression of economic theories has led to numerous sorts of economic utility.

Types of Utility

There are mainly four kinds of utility: form utility, place utility, time utility, and possession utility. These utilities affect an individual’s decision to purchase a product. However, all of these utilities may leave a notable impact. 

Consequently, firms and organisations have a reason to improve the utility of their commodities. By modifying the well-perceived products, they can bring in more customers and escalate their earnings. Let’s have a look at the four types of commercial utility in detail.

1. Form

This type of utility is formed by the product design or the service itself. The more accurately a commodity or service is produced based on customer desires and requirements, the higher will be its accepting value (form utility). 

In other words, form utility can be achieved by translating customer requirements and necessities into services and goods. To make this happen, companies examine their target areas and observe the potential consumers infer what they are looking for. This information is useful in placing product characteristics with real consumer requirements. So, form utility can be generated by making use of appropriate design, fine quality materials, and providing a wide range of resources from which to select.

For example, consider a car producing company named Luxury Cars. This organisation could sell vehicle parts separately. But, by assembling all the parts and presenting a whole vehicle, it adds to the value derived by consumers and increases the form's utility.

This type of utility is made by the merchandise design or the service itself. The more accurately a commodity or service is produced supporting customer desires and requirements, the upper are going to be its accepting value (form utility).

2. Place

By providing easy access to services and goods for the customers, place utility can be acquired. If a product can be purchased without putting much effort, consumers get more attracted to it. Place utility relies on the store sites on which the products are being sold and distribution mediums. Some economists even suggest that the availability of a product on the digital market influences utility. That is because nowadays, almost all varieties of goods and services can be purchased online.

Referring to the previous example, let’s think that Luxury Cars is an Indian company. If its vehicles are only sold within India, it won’t be attractive for people who live in Thailand. But, if Luxury Cars start dealing across the globe, the utility of the cars will increase for worldwide customers.

By providing quick access to services and goods for the purchasers, place utilities are often acquired. If products are often purchased without putting much effort, consumers get more interested in it. Place utility depends on the sites on which the products are sold. Some economists even suggest that the supply of a product on the digital market influences utility. That’s because nowadays, most sorts of goods and services are often purchased online.

3. Time

Time utility in economics can be obtained if a commodity or a service is readily available to customers when they need it. The availability of a product has to be fast. Moreover, time utility becomes high when a product or service is scarce. The supply chain management of a company has a substantial impact on time utility. It involves various processes, like logistics, storage, and delivery. Organisations are continuously enhancing their supply chain management systems to provide 24x7 availability and same-day delivery of a product.

For instance, consider an online car rental service. If a company can provide a rental car at a consumer’s disposal based on individual customers’ urgency of need, it can enhance time utility for consumers. 

Time utility in economics is often obtained if a commodity or a service is quickly available to customers once they need it. The supply of a product has got to be fast. Moreover, time utility becomes high when a product or service is scarce. The availability chain management of a corporation features a substantial impact on time utility. It involves various processes, like logistics, storage, and delivery. Organisations are continuously enhancing their supply chain management systems to supply 24x7 availability and same-day delivery of a product.

4. Possession

This utility defines the satisfaction and gains received from using and having a particular commodity. In general, a useful product holds a more enhanced possession utility. Concerning marketing theories – possession utility has its mention in the ease of possession as well. That is done through acquisition processes like credit cards or renting contracts. An easy acquisition makes a utility to be perceived highly by consumers. At the same time, after-sales services influence possession utility. The better the after-sales services, the more consumers will derive possession utility from using a particular product. 

For instance, if a consumer notices that his AC is malfunctioning and cannot avail repairing services within an agreeable time, possession utility from that AC will fall. Conversely, if the concerned AC company promptly addresses the issue and fixes the AC within an agreeable period, possession utility will increase.                                                   

This utility defines the satisfaction and gains received from using and having a specific commodity. Generally, a useful product holds a more enhanced possession utility. Concerning marketing theories – possession utility has its mention within the simple possession also. That’s done through acquisition processes like credit cards or renting contracts. a simple acquisition makes a utility to be perceived highly by consumers. At an equivalent time, after-sales services influence possession utility. The higher the after-sales services, the more consumers will derive possession utility from employing a particular product.

Measures of Utility

Cardinal Utility

This analysis is a measurement of utility that tells how utility can be expressed in numbers, and a consumer can express his/her satisfaction numerically.

Ordinal Utility

Ordinal utility analysis does not quantify utility in numerical expressions.

The above concept of utility is presented by Vedantu, and you can refer to our website for more topics related to Economics for senior secondary level.

A customer is the one who usually determines his demand for goods based on the idea of the satisfaction (utility) that he procures from them. 

Utility of products is their need-satisfying capability. More is that the aspiration to possess the products, the more will be the utility procured from them. Utility is instinctive. Distinct people can get different degrees of utility from equivalent goods. As an example, someone who likes sweets will get much higher utility from a sweet than someone who doesn’t like sweets.