CONCEPT OF UTILITY AND HOW IT CHANGES

What is utility?
The satisfaction people derive from their consumption activities.Utility is the want satisfying power of any commodity or capacity of a commodity to give satisfaction.
At the end of the day you should be happy because you are in pursuit of happiness.
This satisfaction in economics is termed as utility. It is the satisfaction level.
Example- you have a choice of either studying or playing cricket. You compared the utility you are going to get from both. You thought if you play cricket at that particular time you will be satisfied so you decided to play cricket.
Types to measure utility
Ordinal utility vs cardial utility
Cardial utility basically gives ratings. For example: Bahubali 2 movie got 8.8 IMDB rating. The way how you quantify is cardial utility.
That rating then leads to ranking. For example: Bahubali became the best film i.e. it ranked 1st among all other films released with it. Once its ranked we only go for ranks. We will definately go for top 10 films of that month.
This ranking process is ordinal utility.
HOW UTILITY  DIMINISHES?
Principal of diminishing marginal utility: The more of a good that one consumes in a specific period of time the less additional utility derived from additional unit.
Example: Suppose you are very hungry and you bought 5 cakes for youself. You ate the 1st cake
and it had a high satisfaction. When you are eating the second cake your appetite is getting more satisfied. When you are taking the third you are actually getting less benifit or less satisfaction and the utility decreases.
Utility diminishes over time: The shorter the time period the more quickly marginal utility diminishes.
Consumers are not identical: The rate at which marginal utility diminishes depends on individual tastes and preferences and so differs across customers.
Example: Suppose a new movie released. You may liked that story so much that you watched 3 times and tgen got satisfied on the other hand your friend watched only once and he got satisfied and did not want to watch again.

HOW DO WE MEASURE UTILITY?

Before seeing how to measure utility, let us see what does utility actually mean :- The Concept of Utility is the satisfaction people derive from their consumption activities.

 Assumptions :-

·         Tastes and preferences are fixed and given, and play a large role in decision making.

·         People allocate their income to maximise their satisfaction or total utility.

Now to measure utility there are two approaches, they are  :-

1.       CARDINAL UTILITY.

2.       ORDINAL UTILITY.

Let us discuss about each in detail.

CARDINAL UTILITY

Cardinal utility says that we can measure the utility that is derived from a product in quantitative terms. It also specifies about “UTILS”, which according to the cardinal approach, is the units to measure utility. Let us understand with an example.

Suppose if you buy a Xiaomi smartphone you will get 4000 units of satisfaction and on buying an Apple IPhone you will get around 9000 units of satisfaction. This assigning of a quantitative value to a level of satisfaction derived (which is basically a psychological factor) is what is called as CARDINAL APPROACH.

Another example can be the product ratings we find on e-commerce sites, where the level of satisfaction of the user of the product is often measure on a scale of 0-5 or 0-10 and so on. This is also an example of cardinal approach.

There is another group of economist’s that believe that utility cannot be measured in quantitative terms, hence we have what is called as the ORDINAL UTILITY APPROACH. Let us see in detail

 

ORDINAL UTILITY

Even after knowing rating’s, we tend to focus of ranking or ORDINAL UTILITY. Ordinal utility says that we cannot measure utility in perfect quantitative terms. But we can definitely rank them accordingly and say which gives us more satisfaction over the other.

For example, let’s say a person who is very thirsty at the moment and he is provided with a sandwich and a glass of water. It might not be possible to say how much how much satisfaction is derived from each but, he can easily say that which of the two gives him more satisfaction. In this case as he is thirsty, the glass of water will provide him more satisfaction. This approach to measure utility is what is called as ORDINAL “UTILITY APPROACH”.

In real world usage there is no perfect rule as to which is used in every case, but it is a mixture of both cardinal utility and well as ordinal utility.