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Economic Theory

Concept of Utility. In the ordinary language, ‘utility’ means
‘usefulness’. In Economics, utility is defined as the power of a commodity
or a service to satisfy a human want. Utility is a subjective or
psychological concept. The same commodity or service gives different

utilities to different people. For a vegetarian, mutton has no utility. Warm
clothes have little utility for the people in hot countries. So utility depends

on the consumer and his need for the commodity.
Total Utility refers to the sum of utilities of all units of a commodity
consumed. For example, if a consumer consumes ten biscuits, then the
total utility is the sum of satisfaction of consuming all the ten biscuits.

Marginal Utility is the addition made to the total utility by consuming
one more unit of a commodity. For example, if a consumer consumes 10
biscuits, the marginal utility is the utility derived from the 10th unit. It is

nothing but the total utility of 10 biscuits minus the total utility of 9
biscuits. Thus

MUn = TUn – TUn-1, (6.1)

where MUn – marginal utility of ‘nth’ commodity,
TUn – total utility of n units,

TUn-1 – total utility of n-1 units.

2. Law of Diminishing Marginal Utility
The law of diminishing marginal utility explains an ordinary
experience of a consumer. If a consumer takes more and more units of a

commodity, the additional utility he derives from an extra unit of the
commodity goes on falling. Thus, according to this law, the marginal
utility decreases with the increase in the consumption of a commodity.
When marginal utility decreases, the total utility increases at a diminishing

rate. Gossen, Bentham, Jevons, Karl Menger contributed initially for the
development of these ideas. But Alfred Marshall perfected these ideas and
made it as a law. This Law is also known as Gossen’s I Law.

According to Marshall, “The additional benefit which a person
derives from a given increase of his stock of a thing diminishes with every
increase in the stock that he already has”.
Assumptions of the Law:

1. The units of consumption must be in standard units e.g., a cup of
tea, a bottle of cool drink etc.

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