Utility: Utility is the ability of a good or service to satisfy human wants.

The amount of happiness or pleasure created through the consumption of a good or service is called
utility.
Utility is a measure of satisfaction an individual gets from the consumption of the commodities. In other
words, it is a measurement of usefulness that a consumer obtains from any good. A utility is a measure
of how much one enjoys a movie, favourite food, or other goods. It varies with the amount of desire.
What Is Utility?
In economics, utility is a term used to determine the worth or value of a good or service . More
specifically, utility is the total satisfaction or benefit derived from consuming a good or service.
Economic theories based on rational choice usually assume that consumers will strive to maximize their
utility. The economic utility of a good or service is important to understand because it directly influences
the demand, and therefore price, of that good or service. In practice, a consumer's utility is usually
impossible to measure or quantify. However, some economists believe that they can indirectly estimate
what is the utility of an economic good or service by employing various models
Concept of utility.
A. Initial Utility. Initial utility means the utility derived from the consumption of its first unit. Initial
utility always remain positive.
B. Marginal Utility. The marginal utility which results from a unit increase in Consumption.
MU = dU/dX
Types of marginal utility:
1. Positive marginal Utility: Addition to the total utility by the consumption of an additional unit.
2. Zero Marginal utility: No addition to the total utility by the consumption of an addition unit.
3.Negative marginal utility: The consumer get negative marginal utility after obtaining maximum
satisfaction from the commodity.
C. Total utility. Total utility refers to the entire amount of satisfaction obtained from consuming
various quantities of a Commidity.
Tu = MU1 + MU2 + MU3 + ……….+ Mun

Meaning of Total Utility:

Total Utility refers to the total satisfaction obtained from the consumption of all possible units of a
commodity. For example, if consumption of one apple gives a person satisfaction of 10 units and
consumption of another apple gives the satisfaction of 8 units, the total satisfaction from two apples will
be (10+8) = 18 units. If one more apple gives him the satisfaction of 6 units, then total satisfaction
becomes (10+8+6)=24 units.
TUn = U1+U2+U3+………..+Un
Where,
TUn = Total utility from n units of a given commodity
n = number of units consumed
U1, U2, U3 ………….Un = utility from 1st, 2nd, 3rd to an nth unit of commodity.

Measurement of utility.
1. Cardinal measurement. 2. Ordinal Measurement.
What is mean by cardinal utility? The cardinal utility states that the level of satisfaction a consumer
acquires after consuming any goods and services can be measurable and expressed in quantitative
numbers. What is Cardinal Utility? According to classical economists, utility is a quantitative concept that
can be measured in terms of a number. Hence they introduced the concept of measuring utility using a
cardinal approach. According to this concept, the utility can be expressed similarly to how weight and
height are expressed. However, the economists lacked a precise unit for utility. Hence, they derived a
psychological unit termed as ‘Util’. Util is not regarded as a standard unit because it varies from person
to person, place to place, and time to time. For example, if a person assigns 30 utils to a pizza and 20
utils to a chowmein, we can understand that the pizza has double the capacity to satisfy what humans
want.
What is the concept of ordinal utility? The concept of ordinal utility states that the level of satisfaction a
consumer obtains after consuming various commodities cannot be measured in numbers but can be
arranged in the order of preference. What is an Ordinal Utility? Ordinal Utility states that the satisfaction
a consumer gets after consuming a good or service cannot be scaled in numbers, whereas, these things
can be arranged in the order of preference. Two English economists, John Hicks and R.J. Allen 1930
argued that the consumer behavior theory should be introduced based on Ordinal Utility. According to
the ordinal approach, utility is a psychological phenomenon like happiness, satisfaction, and welfare.
The ordinal theory is highly subjective and differs across individuals. Therefore, it cannot be measured in
quantifiable terms.
Key Difference between Cardinal Utility and Ordinal Utility:
❑ Cardinal Utility is a utility that determines the satisfaction of a commodity used by an individual and
can be supported with a numeric value. On the other hand, Ordinal Utility defines that satisfaction of
user goods can be ranked in order of preference but cannot be evaluated numerically.
❑ The measuring term for cardinal and Ordinal Utility is utils and ranks respectively. Utils is the unit of
utility and ranks determine the preference of a product compared to other products in the market.
❑ Ordinal Utility measures the utility of goods subjectively, but Cardinal Utility evaluates objectively.
❑ Cardinal Utility is not much realistic as compared to the Ordinal Utility as quantitative evaluation of
utility is not practicable. Ordinal Utility depends on qualitative measurement, which makes it more
realistic.
❑ Another difference between ordinal and Cardinal Utility is that the former one is based on
indifference curve analysis, and the latter is based on marginal utility evaluation.
❑ Alfred Marshall and his admirers presented the Cardinal Utility approach, and Hicks and Allen
pioneered the Ordinal Utility idea.
❑ Another point that can be considered as a difference between cardinal and Ordinal Utility is that
ordinal evaluation is sure to give outcomes. The Ordinal Utility is preferred more because it provides
more robust results. Conversely, the concept of Cardinal Utility is obsolete, but still, it is used for
contexts like discounted utilities, making settlements under risk and utilitarian welfare calculations.
Conclusion: Cardinal and Ordinal Utility are two important theories of utility. Cardinal Utility provides a
value of utility to different alternatives. In other words, it enables consumers to rank the magnitude of
how much they prefer one good over another. On the other hand, Ordinal Utility ranks in the order of
preference. The Ordinal Utility does not permit consumers to rank the magnitude of how much they
prefer one good over another
Meaning of Marginal Utility:
Marginal Utility refers to the additional utility derived from the consumption of one more unit of a given
commodity in a given time period.
As in the above example, the total utility increases from 18 to 24 units after the consumption of 3rd
apple. Thus, an additional 6 units are the marginal utility-driven from the 3rd unit of apple.
MU can be calculated as
MUn = TUn – TUn-1
Where
MUn = marginal utility from an nth unit
TUn = Total utility from n units
TUn-1 = Total utility from n-1 units
In simple words, MU is the change in total utility when more unit of a given commodity is consumed.
Therefore,
“MU= Change in TU/ Change in units consumed”
In this article we will discuss about the relationship between Total Utility and Marginal Utility.
Every commodity possesses utility for the consumer. When the consumer buys apples he receives them
in units, 1, 2, 3, 4 etc., as shown in table 1. To begin with, 2 apples have more utility than 1; 3 more
utility than 2, and 4 more than 3. The units of apples which the consumer chooses are in a descending
order of their utilities.
In his estimation, the first apple is the best out of the lot available to him and thus gives him the highest
satisfaction, measured as 20 utils. The second apple will naturally be the second best with lesser amount
of utility than the first, and has 15 utils. The third apple has 10 utils and the fourth 5 utils. Total utility is
the sum total of utilities obtained by the consumer from different units of a commodity. In our
illustration, the total utility of two apples is 35 = (20 + 15) utils, of three apples 45 = (20 + 15 + 10) utils,
and of four apples 50=(20+15+10+5) utils.
Marginal utility is the addition made to total utility by having an additional unit of the commodity. The
total utility of the two apples is 35 utils. When the consumer consumes the third apple, the total utility
becomes 45 utils. Thus, marginal utility of the third apple is 10 utils (45—35). In other words, marginal
utility of a commodity is the loss in utility if one unit less is consumed. Algebraically, the marginal utility
(MU) of N units of a commodity is the total utility (TU) of N units minus the total utility of N-1. Thus
MUN = TUN —TUN. The relation between total and marginal utility is explained with the help of Table 1

So long as total utility is increasing, marginal utility is decreasing up to the 4th unit. When total utility is
maximum at the 5th unit, marginal utility is zero. It is the point of satiety for the consumer. When total
utility is decreasing, marginal utility is negative (the 6th and the 7th units). These units give disutility or
dissatisfaction, so it is no use having them. This relationship is shown in Figure 1. To draw the curves of
total utility and marginal utility, we take total utility from column (2) of Table 1. and obtain rectangles.
By connecting the tops of these rectangles with a smooth line, we get the TU curve that peaks at point Q
and then slowly declines. To draw the MU curve, we take marginal utility from column (3) of the table.
The MU curve is represented by the increment in total utility shown as the shaded block for each unit in
the figure. When the tops of these blocks are joined by a smooth line, we obtain the MU curve. So long
as the TU curve is rising, the MU curve is falling. When the former reaches the highest point Q1 the
latter touches the X-axis at point С where the MU is zero. When the TU curve starts falling from Q
onwards, the MU becomes negative from С onwards
Law of Diminishing Marginal Utility:
Definition of the Law:
"Other things remaining the same when a person takes successive units of a commodity, the marginal
utility diminishes constantly".
The marginal utility of a commodity diminishes at the consumer gets larger quantities of it. Marginal
utility is the change in the total utility resulting from one unit change in the consumption of a
commodity per unit of time.
Assumptions:
Following are the assumptions of the law of diminishing marginal utility.
1. The utility is measurable and a person can express the utility derived from a commodity in qualitative
terms such as 2 units, 4 units and 7 units etc.
2. A rational consumer aims at the maximization of his utility.
3. It is necessary that a standard unit of measurement is constant
4. A commodity is being taken continuously. Any gap between the consumption of a commodity should
be suitable.
5. There should be proper units of a good consumed by the consumer.
6. It is assumed that various units of commodity homogeneous in characteristics.
7. The taste of the consumer remains same during the consumption o the successive units of
commodity.
 8. Income of the consumer remains constant during the operation of the law of diminishing marginal
utility.
9. It is assumed that the commodity is divisible.
10. There should be not change in fashion. For example, if there is a fashion of lifted shirts, then the
consumer may have no utility in open shirts.
11. It is assumed that the prices of the substitutes do not change. For example, the demand for CNG
increases due to rise in the prices of petroleum and these price changes effect the utility of CNG.
Explanation with Schedule and Diagram: We assume that a man is very thirsty. He takes the glasses
of water successively. The marginal utility of the successive glasses of water decreases, ultimately, he
reaches the point of satiety. After this point the marginal utility becomes negative, if he is forced further
to take a glass of water.
The behavior of the consumer is indicated in the following schedule:

The limitations or exceptions of the law of diminishing marginal utility are as follows:
1. The law does not hold well in the rare collections. For example, collection of ancient coins, stamps
etc.
 2. The law is not fully applicable to money. The marginal utility of money declines with richness but
never falls to zero.
3. It does not apply to the knowledge, art and innovations.
4. The law is not applicable for precious goods.
5. Historical things are also included in exceptions to the law.
6. Law does not operate if consumer behaves in irrational manner. For example, drunkard is said to
enjoy each successive peg more than the previous one.
7. Man is fond of beauty and decoration. He gets more satisfaction by getting the above merits of the
commodities
8. If a dress comes in fashion, its utility goes up. On the other hand its utility goes down if it goes out of
fashion.
9. The utility increases due to demonstration. It is a natural element.
Importance of the Law of Diminishing Marginal Utility:
1. By purchasing more of a commodity the marginal utility decreases. Due to this behaviour, the
consumer cuts his expenditures to that commodity.
2. In the field of public finance, this law has a practical application, imposing a heavier burden on the
rich people.
3. This law is the base of some other economic laws such as law of demand, elasticity of demand,
consumer surplus and the law of substitution etc.
4. The value of commodity falls by increasing the supply of a commodity. It forms a basis of the theory of
value. In this way prices are determined
Assumptions of Law of Diminishing Marginal Utility
•Rational Consumers - It requires consumers to behave rationally. They should make sound decisions
at all times. The law assumes that consumers are trying to maximize utility subject to their incomes.
•Continuous Consumption - This assumption is very important for the law to hold. It means that the
consumer continuously consumes every additional unit of the good. Therefore, there should not be
intervals between the consumption of other units. For example, if a hungry person eats a pizza for lunch
and then eats more pizza for dinner, the law is violated because the consumer is again hungry and
derives increased utility from the second pizza than he would if he eats it right after lunch. So, intervals
between consumption of additional units violate the law. Standard Size of Units - The size of every unit
should be common. If a person drinks half of a glass of water, drinking another half glass after it might
not diminish the utility since he has not yet derived the total utility from consuming a full unit of the
good. Reducing the size of units consumed is not consistent with the law of diminishing marginal utility.
Exceptions of Diminishing Marginal Utility
•Addictions/Hobbies - This law does not hold in the case of addictions. The marginal utility of having
an additional glass of alcohol does not decrease for an alcoholic. Similarly, in the case of hobbies, a
person who likes to paint might not experience diminishing marginal utility in making a new painting.
Rare Items-It also does not hold in the case of rare items. It is especially true for enthusiasts who chase
such things and are passionate about them. For example, acquiring a limited-edition watch might give
much more satisfaction to an enthusiast who likes collecting watches and already has a lot of them.
•Unrealistic Assumptions - Assumptions made by this law do not always hold. A consumer might
make an irrational decision; there could be intervals between the consumption of units of a good, etc.
The violation of these assumptions might cause the law to not hold for a certain situation. Conclusion
The law of diminishing marginal utility is a very widely studied concept in Economics. It helps us
understand why consumers are less and less satisfied with every additional goods unit. The law is based
on the ordinal utility theory and requires certain assumptions to hold. However, there are exceptions to
the law as it might not have the truth in some cases