Maharashtra Board Class 12 Economics Chapter 2 Utility Analysis PDF Download

Utility Analysis

Let's Recall

1) Want denotes a feeling of lack of satisfaction.

2) Wants are unlimited.

3) They are recurring in nature.

4) They differ with age, gender, seasons, habits and culture.

5) Utility is the capacity of a commodity to satisfy human wants. In other words, utility is the want satisfying power of a good.

Introduction

You have been already introduced to the concept of utility in class XI. This unit gives a detailed explanation of consumer's behaviour.

In practice, every individual tries to satisfy his wants with available resources. It is true that all human wants cannot be satisfied fully at a specific time. Utility analysis explains a consumer's behaviour in relation to maximization of satisfaction.

Try This

1) Make a list of 10 commodities which satisfy your wants.

2) Make a list of 10 commodities which satisfy the wants of particular individuals performing specific activities. For example, A chalk has utility for a teacher.

Teacher's Note

Utility is how much a thing helps us. For example, in India, warm clothes have more utility in winter than in summer.

Exam Trick

Remember: Utility = want satisfying power. A pencil has utility to a student but maybe not to a cook. Always think "Does this help me?" to find utility.

Points to Remember

Utility means the power of a thing to satisfy wants.
Utility is different from usefulness.
Utility changes from place to place and time to time.
Utility is subjective - it differs from person to person.
Utility is ethically neutral - it has no moral meaning.

Features of Utility

1) Relative Concept

Utility is related to time and place. It varies from time to time and place to place. For example, (i) woollen clothes have a greater utility in the winter. (ii) sand has greater utility at the construction site than at the sea shore.

2) Subjective Concept

It is a psychological concept. Utility differs from person to person. This is due to differences in taste, preferences, likes, dislikes, nature, habits, profession etc. For example, stethoscope has utility to a doctor but not to a layman.

3) Ethically Neutral Concept

The concept of utility has no ethical consideration. It is a morally colourless concept. The commodity should satisfy any want of a person without consideration of what is good or bad, desirable or undesirable. For example, a knife has utility to cut fruits and vegetables as well as it can be used to harm someone. Both wants are of different nature but are satisfied by the same commodity. Thus, utility is ethically neutral.

4) Utility Differs From Usefulness

Utility is the capacity of a commodity to satisfy human wants, whereas usefulness indicates value in use of the commodity. For example, milk has both utility as well as usefulness to a consumer, while liquor has utility only to an addict, but has no usefulness.

5) Utility Differs From Pleasure

A commodity may possess utility but it may not give any pleasure to the consumer. For example, injection for a patient has utility because it cures the ailment but it hardly gives any enjoyment or pleasure to him.

6) Utility Differs From Satisfaction

Utility is a cause of consumption, satisfaction is the end result of consumption. They are interrelated but still different concepts. For example, a thirsty person drinks a glass of water since water has the capacity to satisfy thirst. Utility of water is the cause of consumption and the satisfaction derived is the end result of consumption.

Teacher's Note

These six features help us understand utility better. In India, a doctor uses a stethoscope with utility, but a farmer does not. This shows utility is subjective.

Exam Trick

Remember: Utility ≠ Usefulness. A video game has utility to a child but no usefulness. Just think of the word "use" - does it help practically?

Points to Remember

Utility is relative - it changes with time and place.
Utility is subjective - different people have different utilities for the same thing.
Utility has no ethics - it doesn't judge good or bad.
Utility is not the same as usefulness or pleasure.
Utility causes consumption, but satisfaction is the result.

More Features of Utility

7) Measurement of Utility is Hypothetical

Utility is an abstract concept. Cardinal or numerical measurement of utility is not possible. For example, a thirsty person after drinking water, may derive higher or lower level of utility. Thus, utility can only be experienced and found either positive, zero or negative. Negative utility is called disutility.

8) Utility is Multi-Purpose

A commodity can satisfy the want of more than one person, it can also be put to several uses. For example, electricity can be used to serve many purposes and for many people at some point of time.

9) Utility Depends on the Intensity of Want

Utility depends on the intensity of a want. More intense the want, greater will be the utility. As and when the urgency of want declines, utility diminishes. For example, a hungry person finds more utility in food, than a person who is not hungry.

10) Utility is the Basis of Demand

A person will demand a commodity only if it gives utility to him. For example, a sick person has utility in medicines hence, he demands medicines.

Teacher's Note

Utility is useful in many ways. Electricity helps many people in many ways. A hungry student finds more utility in lunch than a full student.

Exam Trick

Remember: No utility = No demand. If something doesn't help you, you won't want to buy it. That's why mobile phones are demanded - they have utility.

Points to Remember

We cannot measure utility with numbers exactly.
One thing can be useful for many people.
The more hungry you are, the more utility food has.
We only demand things that have utility for us.
When utility becomes negative, it is called disutility.

Types of Utility

1) Form Utility

When utility is created due to a change in the shape or structure of an existing material, it is called form utility. For example, toys made of clay, furniture from wood etc.

2) Place Utility

When utility of a commodity increases due to a change in its place, it is called place utility. For example, woollen clothes have more utility at cold places than at warm places. Transport creates place utility.

3) Service Utility

Service utility arises when personal services are rendered by various professionals. For example, services of doctors, teachers, lawyers etc.

4) Knowledge Utility

When a consumer acquires knowledge about a particular product, it is called knowledge utility. For example, utility of a mobile phone or a computer increases when a person knows about its various functions.

Teacher's Note

In India, a carpenter makes wood into a table - that is form utility. A blanket is more useful in Delhi than in Chennai because of place utility.

Exam Trick

Remember the four types: Form (shape change), Place (location change), Service (help from people), Knowledge (learning about it). Think of one example for each.

Points to Remember

Form utility: Wood becomes a chair.
Place utility: Blankets are more useful in cold cities.
Service utility: A doctor gives medical help.
Knowledge utility: Learning how to use a computer makes it more useful.

More Types of Utility

5) Possession Utility

Possession utility arises when the ownership of goods is transferred from one person to another. For example, transfer of goods from the sellers to the buyers.

6) Time Utility

When the utility of a commodity increases with a change in its time of utilization, it is called time utility. For example, a student has more utility for text books during examinations than in the vacations. Time utility is also observed when goods are stored and used at the time of scarcity. For example, Blood bank.

Try This

Following are the various types of utility and their respective examples. Arrange the information in the form of pairs:

Types of utility: Time utility, possession utility, service utility and place utility.

Examples: 1) A dentist giving dental treatment to a patient. 2) A mountaineer using oxygen cylinder at a high altitude. 3) A farmer selling rice stored in the warehouse at the end of the season. 4) A retail trader purchasing 100 chairs from the wholesale trader.

Teacher's Note

Possession utility happens when you buy something from a shop. Time utility is when things become useful at special times - like blankets in winter or fans in summer.

Exam Trick

Remember: Possession = buying (ownership changes). Time = when you need it most (exams need books more than vacations). Match these with examples.

Points to Remember

Possession utility: When you buy something from a seller.
Time utility: Blankets help more in winter than summer.
Blood banks show time utility - blood is useful when needed.
A student needs books more during exams than holidays.
All six types together explain why things are useful.

Concepts of Utility

1) Total Utility (TU)

Total utility refers to the aggregate of utility derived by the consumer from all units of a commodity consumed. It is an aggregate of utilities from all successive units of a commodity consumed.

2) Marginal Utility (MU)

Marginal utility refers to the additional utility derived by a consumer from an additional unit of a commodity consumed. In other words, it is the addition made by the last unit of a commodity consumed.

Teacher's Note

Total utility is like counting all the happiness from eating many mangoes. Marginal utility is the happiness from eating one extra mango.

Exam Trick

Remember: Total = add everything up. Marginal = just the last one. TU = 10+8+6. MU = just 6 (the last piece).

Points to Remember

Total utility is the sum of all utilities from all units.
Marginal utility is the utility from one more unit.
Both are important for understanding consumer behaviour.
Total utility keeps increasing until satiety point.
After satiety, marginal utility becomes negative.

This is a preview of the first 3 pages. To get the complete book, click below.