What is Economic Utility?
Economic Utility is the total amount of satisfaction that a consumer derives by consuming a product. In other words, it can be described as the satisfying power of any good or commodity.
For example, Mr. Vivek can go to his workplace either by cycling or going by car. He prefers cycling as he derives greater utility (both health-wise and cost-saving) from it.
In the above example, the utility is not measured in numbers. When numbers come in to measure utility, we mostly use it for comparison of products.
Suppose a person, Miss Gomes goes on a diet in order to lose weight. She opts for cornflakes in her breakfast. By measuring the utility on a scale of 100, it provides her 60. She might not be getting the exact health benefits which she was looking for. Then she opts for a better brand which only aims for a weight loss program. Here on a scale of 100, it might provide her 100. This might be the exact product that fulfilled her demands.
Therefore economic utility is totally psychology. The utility of a given product may be different for every person based on the demands of the person.
A consumer/buyer usually purchases a particular product when he will derive some benefit/benefit by using the product. He believes that his want will be fulfilled by the use or consumption of the purchased good. Utility totally depends on consumer demand. A consumer’s demand/want will be fulfilled on the basis of the amount of utility fulfilled by the product.
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Types of Economic Utility
An economic utility can be broadly divided into four main types:
- Form
- Time
- Place
- Possession
We will now discuss each form of utility in details:-
1. Form
A utility is created by changing its form. Form utility is the value that the customer sees in the finished product. Every company tries to increase its form utility as the finished product is more useful to the consumer than the raw materials which are used to make it.
Companies always try to understand and analyze the target market segment. This will help the company to figure out what kind of product should they make.
For example
A company may use wood to make finished products like cabinets which will add significant value for the customers and thus increase the form utility.
Wood logs converted to a furniture
Wood pulp is used to make finished products like paper which adds significant value to the customer in everyday life.
2. Place
The physical location for the availability of the product increases the attractiveness of the good to the consumers. So the place utility is more to do with the physical location of the availability of the product and the distribution channels.
For examples
If goods are sold in stores that are close to the buyer’s home or office, it will be convenient and efficient for the buyer.
Goods in store increase the utility of place.
3. Time
The availability of products and services when the customer needs them. The customer wants a good or service depending on the season and the weather conditions.
For examples
Like during the rainy seasons, umbrellas are very important and the demand for them also increases. During the winters, the demand for warm clothes increases. Time utility increases when the product is easily available when the customer needs it.
Companies now are increasing the time utility even more with e commerce’s coming up with one day or same-day delivery services. In this way, time utility increases as the customer get a product when he needs it the most.
4. Possession
If a product can be put to more use, the possession utility of the product increases. Like when we buy a product for one use but is more to more than one use.
For example
we can use a vase for keeping flowers or it can also be used as an item for decoration or it can be used to keep cutleries.
When customers are offered suitable financing facilities to purchase the products which gives them easy methods to possess the product. Like the use of credit/ debit cards and other EMI options will help the customers to possess the product in an easier way.
Vase is used to keep cutleries or flowers.
Can we measure Economic Utility?
Consumers buy a product for different kinds of reasons. The price which a buyer is ready to pay is the worth of the product. No buyer will be ready to pay more than the derived utility from the product.
For example
If I buy a television for ₹ 25,000 then I derive utility equivalent to the value of ₹ 25,000. Similarly, if I buy furniture for ₹ 5,000 then I will derive utility equivalent to the amount I pay.
But many economists have not agreed to the above statement by Prof Marshall because the utility is different for different people and it is completely personal and psychological.
A brand of a television set might fulfill my demand but the same brand X might not fulfill the demand of another person.
Conclusion
Therefore economic utility is the total amount of satisfaction or usefulness that a consumer derives by consuming the good. In other words, the economic utility is how the consumer perceives a given product to fulfill its demand. As discussed there are four different types of utility: Form, Place, Time, and Possession.
Form utility is the amount of value that a consumer sees in the final product. Place utility can be created through the process of making a good or service more easily available to the target customers. Time utility is created by providing easy availability of a good or service at the time when customers need or want it. And lastly, possession utility describes the benefits that will be available to the customers from owning the product.
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