Concept Of Utility And How It's Measured

Utility- Well utility can be defined as the satisfaction people derive from consumption or usage of goods or service. It is measured in terms of "Utils".

People like to utilize fully from their resources or we can say people want to think rationally i.e they want to derive most of the benefits as possible,so they want to use their resources fully.

For example- Imagine a person who went to a restaurant and for rs.120 he judges that food A will yield 15 utils and food B will yield 13 utils,then that person realizes that eating food B will be more beneficial and satisfying. So,here the person wants to utilize the resource(which is rs.120) to get their best satisfaction.

But it also depends on certain circumstances,i.e. tastes and preferences differs from person to person and it impacts hugely on decision making and also the income of people also depends.

How to measure Utility?

There are two ways in which utility can be measured. They are- cardinal and ordinal.

Cardinal Utility- The utility in which the satisfaction is measured in terms of numerically. It is a quantitative approach. It's measured in terms of UTILS.

Example- You went to visit Taj Mahal and Qutub Minar,and after visiting you give ratings on the basis of your satisfaction. On a scale of 5,you rate Taj Mahal highly with 4 and Qutub Minar with 3,this is known as cardinal utility.

Ordinal Utility- The utility in which the satisfaction can be measured in terms of ranks. It is a qualitative approach.

Example- As in previous example you gave ratings higher of Taj Mahal so it will be ranked higher than Qutub Minar.

Utility in Economics

In Economics, Utility refers the satisfaction, which people get from their consumption activities.
Imagine you bought a pair of shoes. The satisfaction you are getting from the shoes, that is utility. Each and every person has different test and preferences. So Utility should varies from person to person.
Utility can be measured in two ways- 1. Cardinal Utility and 2. Ordinal Utility. Cardinal Utility can be measured in a scale and Ordinal Utility can be measured on the basis of ranking. Imagine you bought two Shirts, among them, according to you, first shirt's utility is 100 utiles and second shirt's utility is 150 utiles. This is Cardinal utility. And as the second shirt's utility is more than first one, so the second shirt's rank will be 1 in respect of utility. This is Ordinal Utility.
Utility can decrease gradually over the time. The more shorter the time period, merginal utility decrease more first. Think why World Cup is organised in a gap of four years or why telecom operators give offer like ‘unlimited free night calling’. If World Cup will organised in every year, we will lose our interest on World Cup which means Marginal utility will decrease. This is a characteristic of Utility.