Theory of UTILITY

UTILITY :  By utility we mean the extent of satisfaction obtained from the consumption of the goods and services preferred by consumers. Given the available resources,the level of income,and market prices of various goods,the rational consumer allocates his spending in such a way that the preferred combination gives the highest utility.Utility is measured in utils.

EXAMPLE : A person might get 30 utils of satisfaction from eating a bowl of chocolates while someone else get only 10 utils of satisfaction. This depends upon the satisfaction of the rational consumer .
 EXAMPLE : An individual judges that a piece of pastry satisfies 12 utils of satisfaction and that a piece of brownie satisfies 15 utils, that an individual know that eating the brownie satisfies more as it satisfies 3 more utils than pastry.

Types of Utility :
 1. Cardinal utility
 2. Ordinal utility
 3. Total utility
 4. Marginal utility

CARDINAL UTILITY : Cardinal utility is the utility where the satisfaction is derived by the consumers from the consumption of good or service that can be measured numerically such as 1,2,3....
EXAMPLE :

GOODS         A        B
A                   3          5
B                   4         11
C                   5         13
D                   7         17

ORDINAL UTILITY : Ordinal utility is the utility which cannot be measured, but can only be ranked in order of preference .
 EXAMPLE : Consider five goods A,B,C,D,E from which the consumer has to choose only one.

GOOD        UTILITY         RANK ORDER
A                   10                         3rd
B                   7                           4th
C                   3                           5th
D                  14                          1st
E                  12                          2nd
Here we choose the good "D" as it gives the maximum amount of satisfaction i.e., 14 utils. ranking them in order of preference to match our choice.

EXAMPLE : If a person prefers fruit juice to soda, it means fruit juice has more utility than soda. In this case, fruit juice can be placed in the 1st position and soda in the second, in terms of utility.

TOTAL UTILITY :  The total utility is the total amount of satisfaction from the consumption of that good. The more the units of a particular good a consumer consumes, the greater will be his total utility
 EXAMPLE : If a person consumes 3 slices of cake and the first slice of cake consumes 10 utils, the second slice of cake consumes 8 utils and the third slice consumes 2 utils, the total utility of cake consumed will be 20 utils.

EXAMPLE : A person consumes 30 utils from the first egg, 10 utils from the second egg, 10 utils from the third egg, the total utility he gains is 50 utils i.e., the total amount of satisfaction he derives from egg is 50 utils

MARGINAL UTILITY : The marginal utility is the additional utility derives from the consumption of the extra unit of commodity .
EXAMPLE : If i consumes one chocolate i may satisfy to extent, if i consumes one more chocolate the satisfaction i gain from the  second chocolate will be more compared to the first chocolate.

EXAMPLE : If i purchase clothes for some occasion i satisfy to that occasion, if i continue shopping even  after occasion the satisfaction i gain will be more, this is called additional benefit derives from the utility i.e., marginal utility .