In: Economics

# What is 'Utility' in Economics.

What do you understand by Utility in Economics? Explain.

What do understand by Want in Utility? And what are the characteristics of Want?

What do you understand by 'Law of Diminishing Marginal Utility'? And what are the assumptions of 'Law of Diminishing Marginal Utility' in Economics? Illustrate.

## Solutions

##### Expert Solution

UTILITY-

Consumption is a basic human activity and it is very essential for the survival of any human being. It, in fact, continues from birth to death. We undertake consumption for the satisfaction of our wants, which can be both physical and psychological. In order to have a proper understanding of the process of consumption we must understand the following words:

(i) Want:

Want is a feeling of mental pain, or an experience of lack of satisfaction, which a person feels for not getting a thing. This can he both for physical as well as psychological reasons. If the thing or commodity, in the absence of which we are feeling the pain, is received then our want is fulfilled, that is to say, the feeling of pain disappears. Wants lead to an action designed to provide satisfaction. Wants have several characteristics.

The first is that they are unlimited in number. Even as we satisfy some of the wants, we get accustomed to new wants.

The second characteristic is that they are competitive in nature. Wants compete with each other for limited resources which a person possesses. This gives rise to choice making as we have already seen in an earlier chapter.

The third characteristic is their complementarity. It means that many wants go together. One gives rise to another and the satisfaction of one is not complete without satisfying the other also.

The fourth characteristic of the wants is their recurrent nature. It implies that from the first unit of consumption, but the utility received from the second unit of consumption is 14 only and the total utility for 2 units, therefore, becomes 15 + 14 = 29. The third unit of consumption gives us a utility of 11 only and the total utility becomes 29 + 11 = 40. In this way, the marginal utility goes on diminishing and it finally reaches zero also for the 10th unit of consumption. This means that this commodity is no longer is a position to given any satisfaction. This is also called the point of satiety. If somebody still insists on taking an additional unit, then the marginal utility becomes negative and the total utility starts falling. We also find that the total utility is nothing but a summation of individual utilities of each successive unit, and the marginal utility is nothing but an addition to the total utility. We can also show it as follows.

MUn = TUn - TUn-1

Where,

MUn =  Marginal utility of n units

TUn =  Total utility of n units

TUn-1 =  Total utility of n-1 units

If we analyse the above situation we can say, that as we go on taking some units of consumption, our wants go on being partially satisfied. Therefore, the intensity of want goes on diminishing and accordingly, the satisfaction also goes on diminishing. After 9 units our want has been fully satisfied and therefore, the next unit would not give any satisfaction and the utility derived from the next unit becomes '0' and after that it becomes negative or in other words the utility becomes disutility:

The above phenomenon is called the Law of Diminishing Marginal Utility, which can be stated as follows:

 NOTE -   The law of diminishing marginal utility was first given by a German writer Hermann Heinrich Gossen in the middle of nineteenth century. It is, therefore, also called as 'The first law of Gossen'. Similarly, the law of equimarginal utility is called 'the second law of Gossen'.

“As we go on consuming more than one unit of consumption, the utility derived from each successive unit of consumption goes on diminishing."

Here, it needs to be clarified that marginal utility would be diminishing but at what rate it would be diminishing, is not certain. In the above table we find that sometimes it falls by 1, sometimes by 2 and sometimes by 3 units. It is also to be noted that, it is possible in some cases that initially the marginal utility is increasing, but the phenomenon of increasing marginal utility would be restricted to only first few units of consumption. After that, the application of the law of diminishing marginal utility is inevitable.

Assumptions of the Law -

The law of diminishing marginal utility is based on the following assumptions.

1. All units of consumption of the commodity are homogeneous in nature i.e. they are exactly the same in size, quantity, quality etc.

2. There is no time gap between the different units of consumption i.e. the process of consumption continues without a time lag.

3. The taste and choice of the consumer for the commodity does not change.

4. This law also assumes that the marginal utility of money is constant (although some economists do not agree with it).

Consumption is a basic human activity and it is very essential for the survival of any human being.