Economic Utility Definition | Types of Utility And Marginal Utility

Meaning of Economic Utility Definition

Economic utility definition refers to the satisfying power of a given commodity or good. Briefly stating it depicts the consumer’s total amount of satisfaction derived by consuming that product. The economic utility definition is a psychology of an individual which can be different for every person based on their demands.

Based on the customer’s requirement or need, the product is assigned its utility. Utility depends on consumer demand. A buyer purchases a particular product when he believes his want can be fulfilled by the consumption or use of that specific product. 

Economic Utility Definition
Economic Utility Definition

Economic utility definition is not always the same as usefulness. Like, a thirsty individual may consume soda instead of any other beverage which might give him higher utility based on the requirement. Moreover, for an unknown product that is yet to be launched, the utility can be created.

For example, a robot can be an invention by a company and therefore make customers realize changes in lifestyle and ease that a robot can add to the day to day work. 

Characteristics of Economic Utility Definition

There are few characteristics of economic utility definition which are common behaviour for every example:

  • Satisfaction
  • Pleasure
  • Utility is relative
  • Subjective 
  • Abstract
  • Usefulness

Measures of Economic Utility

There are specifically two measures of economic utility definition namely cardinal and ordinal which are discussed under :

Cardinal Utility 

According to the cardinal utility, the utility of a commodity can be measured due to which it can be added, subtracted, or compared. It denotes/measures the utility in terms of utils. Like if an apple provides 10 utils of utility and a banana provides 20 utils, so it can be said that a banana has double satisfaction ability than an apple.

Ordinal utility

Whereas the ordinal numbers stand 1st, 2nd or third etc till so on. This explains the customer’s order preference of the product or its choice but it does not describe how much he prefers one to the other. 

The marshall utility is based on cardinal prospect while the Hicks follows the psychological and subjective aspect of ordinal utility. As a result, Hicks rejects the quantitative aspect and measures ordinally the indifference curve technique. 

6 Types of Utility

An economic utility definition can be divided into four major kinds which as follows:

6 Types of Utility
6 Types of Utility
  • Time 
  • Form
  • Place
  • Possession
  • Service
  • Knowledge


From the 6 types of utility, this kind explains or check the availability of services and products when customers want them. Consumers need the products according to the weather conditions and season.

Like, during the rainy season, an umbrella becomes a necessity due to which its demand increases while for winters there is a demand for warm clothing. Blood donation has time utility and food chains stored provided during shortage that is sold at a higher price. Time utility is always more in the time of scarcity.

Therefore, this economic utility definition increase with the easy availability of product when a consumer needs it the most. As a result, with the help of eCommerce customer relationship management, the companies are increasing the time utility providing same-day or one-day delivery services like Amazon Prime. 


Form utility refers to change in a matter of substance to make it more serviceable or useful or create a economic utility definition which is usually done through manufacturing activity.  It states the value seen by a customer in a finished product. Since the finished products are more useful to the customers as compared to raw materials, so the company tries to increase its form utility.

Companies understand and analyse the target market segments which helps them to guide what kind of products the customers want. For utility in economics examples, wood pulp is used to make paper, a finished product that increases the form utility and adds value to the consumer. 


The availability of the product depends upon the physical location which increases the attractiveness of the product to the customers. Therefore, place utility is created when goods are transported from a place of abundance to scarcity. So from the 6 types of utility, place utility covers the distribution channels and physical locations for the easy availability of the product.

For utility in economics examples, if the groceries or daily need products are sold near to the customers home in stores, it will make the task more efficient and convenient for the buyer.

Possession / Ownership 

If a product has evoked utility or can be put to more use, then the possession utility of the commodity increases. This explains when the consumer buys a product for one use but has extra benefits as well.

Possession utility occurs for the product when the customers are given suitable financing facilities to buy the goods that give easy ways to possess the product. Like using debit and credit cards with other EMI options helps to purchase products conveniently.

Also, it explains that change in ownership creates economic utility definition. The goods are transferred from wholesalers to retailers then customers. As a result, the buyer enjoys the possession utility. Like when a student purchases a book.


This kind of utility is created by companies that provide personal services to customers. The professionals create this utility. The service utility does not lead to production like tangible goods that provide satisfaction to the customers who demand them.

Instead service utility ensures utility, not in measurable form but a mental state. Like: services of restaurants, doctors, chartered accountants, teachers, salon, banking etc. 


Due to access to technology and research knowledge for goods and services, customers can discover new uses of various goods. As a result, an increase in knowledge for product leads to increased utility.

For example, a senior citizen may not prefer to purchase a smartphone or laptop due to lack of knowledge but might become interested once he understands the perks of the same. Thus increasing the economic utility definition.

Total utility 

It refers to the overall satisfaction gained by the consumer after consuming all the units of the commodity. It depicts by TU. 

Marginal utility 

Marginal utility explains the satisfaction gained by the consumers after consuming an extra unit of a good. It determines the benefit obtained from the additional unit. Marginal utility definition economics is represented by MU. 

The formula to find marginal utility definition economics is :

MU(x) = TU / Q  (for continuous series) OR            MU(x) = TUn – TUn-1   (for discrete series)

The marginal utility tends to decrease with consumption but it can be zero depending upon the good consumed. It is useful to explain customers choices to get maximum benefits from limited budgets. 

Therefore, people continue the consumption till the point marginal utility is greater than the marginal cost or equal to the price of the good. This concept uses by economists to analyse how much an individual is willing to purchase.

Behaviour / Types of Marginal Utility

Depending on the level of consumption, Marginal utility has certain behaviour which is of three common kinds discussed below:

Positive Marginal utility 

Positive economic utility definition occurs when an additional unit brings extra satisfaction to some extent. Suppose eating a second chocolate bar brings some extra is termed as a positive marginal utility. Briefly, when the extra unit continues to give satisfaction, the marginal utility remains positive.

Zero marginal utility 

Zero marginal utility occurs when consuming one more item by an individual no longer brings an extra measure of satisfaction to the person. Like after consuming three chocolates, the person may not feel better after the 4th one which leads to this economic utility definition. 

Negative marginal utility 

When consuming more of an item harms the individual, it leads to negative marginal utility. Like the fifth consumption of chocolate might cause stomach pain or make the person sick.

Table Representation 

QuantityTotal UtilityMarginal Utility(TUn – TUn-1)
  • Here, the positive marginal utility or total economic utility definition maximises after consuming 4 units of the above commodity. 
  • The 5th unit provides zero marginal utility, so the individual is indifferent between the 4th and 5th item.
  • But if the consumer eats 6th unit or further, it will lead to negative marginal utility or he might become sick.

Graphical representation  

Total And Marginal Utility
Total And Marginal Utility
  • The graph above explains that the total economic utility definition first increases at an increasing rate, then increases at a decreasing rate, attains a maximum and then finally falls.
  • However, this change occurs due to marginal utility that decreases due to the law of diminishing marginal utility.
  • In the above example, at the 5th unit, the utility becomes zero. While the 6th unit leads to dissatisfaction.

Applications of Marginal Utility 

There are also some utility in economics examples or common applications of marginal utility definition economics in the real world which are as follows:

Consumer Behaviour (consumption of goods)

Consumers only seek out the products that provide them with higher marginal utility. Therefore, an informed company spots a trend in the market, and analyse it to offer more economic utility definition.

Progressive Taxation System

It justifies the progressive taxation system. The idea that individuals with high income pay more for tax than those with a lower income are a term of rational marginal utility deduction. Marginal cost is greater than marginal utility when a competing flax tax rate notes as oppressive to low-income individuals.

Product innovation

Motor vehicle manufacturers know how to apply the law of marginal utility. Like if a product performs better in the market, the company adds features to sustain sales volume or position higher in pricing.

Executive decision (for pricing an item)

This understands when a company sells two products. Suppose One product has greater preference over the other. Then using marginal economic utility definition deduction, the company should set a higher price for the chosen product by the customers.

Law of Diminishing Marginal Utility

The law of diminishing marginal utility explains that utility gained from an additional unit due to an increase in consumption decreases with each subsequent increase in the level of consumption. Therefore, it determines the marginal utility decreases with consumption where economic utility definition is satisfaction.

The Law of diminishing marginal utility specifies that the urge of an individual for more and more of the same product gradually declines. As a result, the first unit gives him maximum satisfaction. It states how the first unit of consumption carries more economic utility definition than the later ones. 

For example, Advait is hungry and grabs a burger for his satisfaction which will be directly proportional to his hunger level. Therefore, the first one gives him higher satisfaction with his need as compared to the first one and so on. As a result, his hunger level will reduce with greater consumption less satisfaction from further intake.

Conclusion of economic utility definition

This explains the economic utility definition is simply the satisfaction of the customer from the consumption of an item. It is majorly of two kinds known as total utility and marginal utility where this urge decreases with an increase in consumption which refers as the law of diminishing marginal utility that can further be explained by table and graph presentation.

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