Wednesday, 14 January 2015

Scarcity, Utility, Marginal Utility and Total Utility

What is Scarcity?
Scarcity means lack of enough quantity of anything. It denotes to a situation where your requirements are for more quantities than those available to you. So, you experience shortage of items or resources to satisfy your demands.

In economics, this shortage or scarcity of resources makes you to take decisions and choose things carefully so as to get utmost satisfaction from the limited options available. The resources are either limited or they are not fully available for use thereby leading to scarcity because of the unlimited wants of human beings.

What is Utility?
Utility, in Economics, refers to the quantum of satisfaction derived by consumers while consuming goods or services. This consumer satisfaction is a major factor determining all the activities of demand and supply. Prices are fixed on this capability of goods to provide utility to consumers.

How Utility is measured?
  • Utility is measured or assessed by the degree of consumer's willingness to pay a certain amount of money to gain that utility.
  • It is rather some assumption that the product has certain amount of utility equal to the price paid the consumer to have it.
  • The consumer is ready to pay an increased amount of price to obtain that level of satisfaction as he wants to get it instead of changing to other products or services. This means that he is getting a good level of utility from that goods or service. So the product has that much amount of utility that he is willing to pay to have it.
What is Total Utility?
Total utility refers to the total quantity or measurement of satisfaction derived by a consumer by purchasing different number of units of the product. If you consume one unit, you will get certain level of satisfaction. If you get another unit, the level will increase. So the total satisfaction derived by you increases, as you go on adding more units. This total satisfaction derived is known as total utility of that product for you.

What is Marginal Utility?
Marginal utility refers to the extra amount of satisfaction derived by you when you consume one more unit of anything. 

Normally, a consumer will derive more satisfaction from the first unit that he consumes. As he goes on increasing his consumption, the extra unit that he purchases will not give him so much satisfaction that he experienced from the previous unit. So the extra satisfaction is decreased gradually as he increases his quantity. This quantum of extra satisfaction is known as the marginal utility of that product to him.

For example, take the case of your child eating choco bar candy. The first candy will give him utmost satisfaction. The second candy may not be so much appealing as he already got satisfied by the first candy. If you give him a third and a fourth one, he may not want to eat it any more. On the other hand, if you give only one candy and then a cup of ice cream or milkshake, he can derive same amount of satisfaction from both the candy and the ice cream or milkshake. So his total utility will be more than that he gets by eating 3 or 4 choco bars.

Example - 1
Chocó bar candy
Utility/ Marginal utility
Total Utility
First candy
Second candy
Third candy
Fourth candy

Example -2
Utility/ Marginal utility
Total Utility
Chocó bar candy
Ice cream

From the above two examples, you are able to see that in the first example you are getting 120 units of utility by consuming 4 candies whereas you are able to get same amount of 120 units utility by eating one choco bar and one ice cream only as per 2nd example.

Now, suppose one chocobar costs $1 and one cup of ice cream also costs $1.
So, in example 1, you are paying $4 to get 120 units of utility whereas in example 2, you will be paying only $2 to get same satisfaction of 120 utility.

Now, we come to know that additional units of consumption of same product will go on decreasing the satisfaction. This is known as diminishing marginal utility. The total satisfaction will increase upto certain extent and then it may cease to increase after a point. In the above example, if you take another candy, the marginal utility can be zero units and so total utility will remain same as 120 units only.

On the other hand, if you shift to other products, your utility will be greater because the utility from other product will be more than that got from consuming the same product in most cases.

So utility plays a major role in economics for fixing the prices of commodities.

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