What is utility? Definition and meaning
The definition and meaning of the term utility has several meanings: 1. In economics, it refers to the value for money – satisfaction or pleasure – derived by people from consuming a product or service or from being somewhere. 2. In the world of business it means a company that operates facilities used in generating, transmitting and/or distributing electricity, gas or water to consumers. 3. In information technology it is a program that helps maintain or improve the efficiency of a computer system. 4. In patent law it is the usefulness of a product for which a patent has been applied. If you invent something it must have a use and needs to perform a useful function, that is, if you want it patented.
The utility of something in non-patent legal speak can also refer to how useful it is – how it is utilized.
This article focuses on utility when it refers to the pleasure or satisfaction people feel when consuming a good or service. This meaning was introduced by Daniel Bernoulli (1700-1782), a Swiss physicist and mathematician.
Utility is economist-speak for a good thing – it is a measure of satisfaction. Consumers give each product or service that they purchase a util rating. Underlying most economic theory is the assumption that we do things because doing so gives us pleasure and satisfaction.
Utility – a measure of pleasure
Utility is the way economists measure pleasure or happiness and how that relates to the decisions consumers make. It measures the benefits or drawbacks from consuming a product or service, experiencing something, or taking part in an event.
This measure is important to understand because it directly influences demand, which determines its price.
Measuring a consumer’s utility is not easy. The concept is a key underpinning of rational choice theory in game theory and economics. It can be determined indirectly with consumer behavior theories, which assume that we all strive to maximize utility.
Util – a unit of utility
Classical economists believed that we could measure all utilities as a hard number – we could give each one of them a score. They created the ‘util’, which represents how much psychological satisfaction a product or service generates, for a subset of consumers in a number of different situations.
Total utility refers to how many utils are gained each time we consume the same product or service consecutively. It tends to suffer from diminishing returns, where the additional utils of each portion of a product – in this case pizza – consumed is reduced after the first, until each one is worth zero utils.
If, for example, I judge that chicken nuggets with French fries will yield ten utils and that an American Hot pizza will yield 12 utils, I will know that the pizza will be more satisfying.
For those who produce chicken nuggets and pizza, knowing that the pizza will yield two additional utils helps them determine that it should be sold at a slightly higher price than the nuggets.
Virtually everything has util value
Practically everything we choose to do or buy can be measured in utils, such as eating an apple, living in a certain house, voting for a particular candidate, receiving a wireless phone plan, or driving a sports car. Some things may have a negative score – for example, a woollen sweater for somebody with extremely sensitive skin.
Every decision consumers make in their daily life can be viewed as a comparison between the utils gained from pursuing an option.
For example, imagine Mary wakes up in the morning and is offered the choice of cereal or bacon and eggs for breakfast. In an instant, Mary compares the satisfaction, pleasure and benefits she would derive from each one and selects the bacon and eggs.
Her mother has to take her to school – she can either walk or drive. Mary’s mother considers the benefits of walking – exercise and fresh air – and compares them to the benefits of driving – saving time and sitting in comfort and shelter from the elements. She decides to drive.
Utility is measured in how much an individual values a particular good. This entirely depends on that person’s preferences, and not from some universal or external measure. So, while a pizza and chicken nuggets may give utility values of 12 and 9 respectively to one consumer, they may give 5 and 13 respectively to another.
In ordinary cases, utility is used to denote how useful something is, however, in economics it is used in a much wider sense.
We cannot take utils as a standard unit because it will vary from person to person. Economists say that utility can be measured in terms of the money or price which the consumer is willing to pay.
We all lead different lives – partly because of the choices we make. Look at Mary’s and Joe’s day – they are both presented with identical choices, but have quite different days. When presented with choices, we value each one according to utils – a satisfaction-pleasure-benefit score – and choose the one that, as far as we care concerned, has the highest value.
What is ‘total utility’
What is the most satisfaction I can derive from eating American Hot pizza? If one portion is worth 12 utils, does that mean that I get 120 utils if I consume ten portions consecutively? No it doesn’t.
We can only eat so many portions in one go – the second is worth fewer utils than the first, and the third fewer than the second, etc.
I can only consume three portions of pizza. The first slice yields 12 utils, the second 9 and the third 7. Its total utility is 12 + 9 + 7 = 28 utils.
Robert Browning (1823-1889) was a British poet and playwright – his mastery of the dramatic monologue made him one of the foremost poets of the Victorian age. His poems are famous for their historical settings, challenging vocabulary and syntax, social commentary, dark humor and irony. (Image: inquiriesjournal.com)
With some products, services or events, the utils we assign to them diminish very sharply upon repitition. For example, the first time I saw the film ‘Terminator’, I probably gave it about 20 utils – I was thrilled. Had I been forced to watch it again on the same day, I would have given it a score of no more than five. ‘Terminator’ would have been worth zero utils had somebody compelled me to watch it a third time.
What is marginal utility?
Marginal utility, known as MU, is the additional utility individuals derive by consuming one more unit of something. It is the utility derived from the last portion or unit of something purchased.
As in the pizza example above – where slice 1 = 12 utils, slice 2 = 9, and slice 3 = 7 – when the third portion is consumed, the total increases from 21 to 28 utils. The additional seven utils from the third (the last) portion is the MU.
In this quote, the word ‘utility’ has a different meaning. According to Dictionary.com, a ‘utility man’ is: “1. A worker expected to serve in any capacity when called on. 2. An actor of miscellaneous small parts. 3. (Baseball) A player who is not a regular and whose value lies in an ability to play several positions. (Image: legendsinconcert.com)
In the words of Sir Sydney John Chapman (1871-1951), an English economist who was Chief Economic Adviser to the British government from 1927 to 1932:
“Marginal utility is addition made to total utility by consuming one more unit of a commodity.”
A public utility is a company that supplies consumers with natural gas, water, electricity, etc.
Video – Total and marginal utility
This Burkey Academy video explains what total and marginal utility are.