Concept of Utility

Customers use many products that give them pleasure or satisfaction.

Utility refers to the measure of satisfaction or well-being that a consumer derives from consuming a good or service.

Consider an environmentally conscious customer. She finds utility in a small car that reduces the trapped heat in urban areas.

If she is health-conscious, she may use a smartwatch. The watch provides utility by tracking how often she stands, how much she moves, and the duration of her exercise.

Economists measure utility in two ways. They can do it either cardinally or ordinally.

When utility is measured cardinally, it can be quantified. Here, a hypothetical unit of measurement called utils is used.

For instance, it could be said that a customer gets ten utils of satisfaction from watching a movie and five utils of satisfaction from eating a burger.

In modern economics, the cardinal utility approach is outdated and not used to measure utility.

In the ordinal approach, customers can rank their preferences. However, customers do not express the exact magnitude of the difference in their utility between the two products.

For example, a customer can say she gets more satisfaction from watching a movie than eating a burger.