Glossary term
Utility: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
Utility is the satisfaction or usefulness a consumer obtains from consuming a good or service. Total utility is the satisfaction from all units consumed; marginal utility is the extra satisfaction from one more unit. Marginal utility usually falls as consumption rises, a pattern called diminishing marginal utility.
In more detail
Utility cannot be observed directly, so economists infer it from choices. A consumer who picks one bundle over another when both are affordable reveals a preference. The older approach measures utility in units; the indifference curve approach only ranks bundles, which needs fewer assumptions. Both explain why demand curves slope downward.
Example
The first glass of water on a hot day gives great satisfaction, the fourth much less. The satisfaction from each additional glass is its marginal utility, and it falls.
Key points
- Total utility rises as long as marginal utility is positive.
- Marginal utility tends to diminish.
- Modern theory often uses preferences and indifference curves instead of measuring utility in numbers.
Common mistake
Treating utility as the same as usefulness or price. It is personal satisfaction.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 2: Theory of Consumer Behaviour.