Economics, SS 1, Second Term, Week 3
Topic: Theory of Consumer Behaviour
Contents:
- Definition of utility
- Forms of Utility
- Concept of total, marginal and average utility
- Relationship between Total Utility and Marginal Utility
Definition Of Utility
Utility can be defined as the satisfaction derived from the purchase of a particular commodity. It is the satisfaction that a consumer derives from consuming a particular commodity or services at a particular period of time . It should be noted that any commodity or service that possess utility is useful to the consumer, commodities or services that are not useful to the consumers has no utility i.e no satisfaction.
The usefulness of a commodity is a relative term because what is useful to Mr A might not be useful to Mr B
Utility depends on time, place and form to be able to satisfy human wants.
Types of Utility
The types of Utility are:
Form Utility: Form utility can be defined as the change in the form of or structure of a commodity during its manufacturing process in other to increase its utility. Example: Cotton in its raw form cannot give satisfaction until it is for ed into a clothing material.
Place Utility: This involves the changing of location of of a commodity from one geographical place where it has no little utility to another location where its utility is higher. For example , cattle is mainly reared in in the North where it has little utility but transported to to the south where it has more demand.
Time Utility: This refers to the satisfaction a consumer derives for the consumption of a particular commodity at a given time. All goods produced do not give satisfaction at the same time, some products have to be stored and released later in order to create higher utility on them, especially when their prices increase.
Concepts of Total, Marginal and Average Utility
The Total Utility (TU): Total utility refers to the total amount of satisfaction a consumer derives from the consumption of a commodity at a particular time. It is the total amount of satisfaction derived from all the units of a commodity consumed at a particular time.
Total utility can be calculated by this formula: Total Utility (TU)= Average utility x quantity demanded
Total Utility curve
Marginal Utility: Marginal utility is the additional satisfaction derived by consuming an extra unit of commodity. It measures the extent to which the consumer’s total satisfaction would be increased if he went ahead to consume one additional unit of the commodity .
The formula for calculating marginal utility (MU)= Change in TU
Change in consumption
Marginal utility curve
Average Utility (AU): Average utility is the satisfaction which a consumer derives per unit of a commodity consumed. Average utility is calculated by this formula
AV= TU
Quantity demanded
Average Utility Curve
Relationship between Total Utility and Marginal Utility
There is a unique relationship between total utility (TU) and marginal utility (MU). Their relationship can be summarised in the following ways:
1. The marginal utility begins to fall right after the first unit of the commodity has been consumed and continues to diminish until he reaches zero and below. Total utility increases right from the first unit consumed although the increase is small for every extra unit consumed.
2. At the point where the marginal utility reaches zero,i.e where the MU curve cuts the X-axis, total utility reaches its maximum point . This point is called saturation point.
3. When the marginal utility becomes negative, total utility begins to fall and when the MU curve descends below the x-axis, the TU curve begins to slope downwards. This relationship between TU an MU is explained
Test and Exercise
- Define Utility
- Discuss types of utility
- Briefly describe the relationship between total utility and marginal utility
- Explain with the aid of diagram (Total Utility, Marginal Utility and Average Utility)
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