It 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.
Characteristic of Utility
- It is dependent upon human wants.
- It is immeasurable.
- A utility is subjective.
- It depends on knowledge.
- Utility depends upon use.
- It is subjective.
- It depends on ownership.
Measurement of Utility
Measurement of a utility helps in analyzing the demand behaviour of a customer. It is measured in two ways
(i) Cardinal Approach
In this approach, one believes that it is measurable. One can express his or her satisfaction in cardinal numbers i.e., the quantitative numbers such as 1, 2, 3, and so on. It tells the preference of a customer in cardinal measurement. It is measured in utils.
Limitation of Cardinal Approach
- In the real world, one cannot always measure utility.
- One cannot add different types of satisfaction from different goods.
- For measuring it, it is assumed that utility of consumption of one good is independent of that of another.
- It does not analyze the effect of a change in the price.
(ii) Ordinal Approach
In this approach, one believes that it is comparable. One can express his or her satisfaction in ranking. One can compare commodities and give them certain ranks like first, second, tenth, etc. It shows the order of preference. An ordinal approach is a qualitative approach to measuring a utility.
Limitation of Ordinal Approach
- It assumes that there are only two goods or two baskets of goods. It is not always true.
- Assigning a numerical value to a concept of utility is not easy.
- The consumer’s choice is expected to be either transitive or consistent. It is always not possible.