Utility

Utility refers to the ability of an economic good to satisfy one or more human needs. Economists always hold that consumers seek to maximize their satisfaction from their purchases. It’s significant to pay attention to the usefulness that a person experiences from a product or service as it’s the factor involved in pricing a good. A utility cannot be measured, but the consumer is able to determine which economic good brings him a higher level of utility, and which is not that useful. Nevertheless, some analytics claim that they can apply different models and tools to assess the utility of a product of service. 

Utility explained

Utility is a term that measures the satisfaction received from consuming a good or service. The concept of utility is rather relative. For one person, an economic good can be useful,  while for the other it will have nothing to do with usefulness. Utility depends on features of the product, on the process of consumption itself, and on the individual. 

There are different opinions on how to model economic utility and measure customer satisfaction. The concept of utility was first introduced by Daniel Bernoulli, who was also known as a mathematician and a first articulator of the expected utility hypothesis. Then, the concept of utility started to evolve in the social sciences. Due to the development of theory, economists came up with different types of utility.

There are basically four types of utility: 

• Place utility is the concept of encouraging a customer to purchase a product or service by making it more available to the public.
• Time utility also aims at maximizing the availability of the good, though it depends on the aspect of time and 'when' a consumer can use a product or service.
• Possession utility refers to the value that the buyer receives from owning the product.
• Form utility is the value that comes from the design or physical appearance of a service or product.

Ordinal Utility

In the thirteenth and fourteenth centuries, economists claimed that the value of a product or a service lay in the satisfaction from it. At that time, the category of "utility" received scientific justification and quantitative expression. 

The approach of ordinal utility originated from the ideas stated above. Ordinal utility measures the utility subjectively. It is the satisfaction that the consumer receives from the good he consumes, measured on an ordinal scale. According to this theory, a consumer can tell subjectively whether the good derives more or less or equal satisfaction than the other product or service and compare them.

Cardinal Utility

Cardinal utility theory holds that utility is a measurable entity. The utility here is measured by the absolute values. The consumer prefers to buy a particular product and forces the manufacturer to produce a product through the price mechanism (price is a measure). Consumer behavior allows economists to analyze the demand, which is based on the marginal utility of the product.

In economic theory, there are two approaches to determining marginal utility. The cardinal utility analysis was developed by Alfred Marshall. In the nineteenth century, economists came up with the idea that the consumer is able to compare and to measure the utility of goods in the units called “util”. It is assumed that the consumer is able to determine the utility of the good, as well as its intensity. 

This approach allows experts to utilize math principles and tools for understanding economic theory and relationships. Nevertheless, it is impossible to find accurate utility measures and compare utilities of different people in real life. 

For instance, a person may get 15 utils of satisfaction from a burger and 8 utils from sushi. Comparing them, a person will know that he will be more satisfied with eating the burger. For restaurants that serve both burgers and sushi this information will be useful as it will help them price the restaurant menu.

The law of diminishing marginal utility states that as people consume additional units of a good or service, its marginal utility tends to decrease. It means that a person will get 15 utils from the first bite of the burger but then he will receive less satisfaction. 

Total Utility

The total utility refers to the amount of satisfaction received as a result of the consumption of all units of the good. 

For instance, if an individual consumes 2 slices of sushi and gets 7 utils from the first slide and 5 utils from the second, the total utility from consuming 2 slices of sushi would be 12 utils.

Marginal Utility

Marginal utility is incremental gain in utility, additional utility that the consumer of the good receives when the amount of the consumed good increases by one unit, provided that all other conditions of consumption, including other goods, remain unchanged. 

For instance, if an individual gets 7 utils from the first slide of sushi and 5 utils from the second, the added satisfaction (marginal utility) from consuming the second slide is eight utils.