Economic Utility

Updated on January 28, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Economic Utility Definition

Economic utility refers to the usefulness or value that consumers experience from a product or service and can be judged based on the form, time, place, and possession. These factors help assess the purchase decisions and the drivers behind those decisions.

Key Takeaways

  • Economic utility refers to the satisfaction or value consumers experience from a product or service. It encompasses four types of utility: form, time, place, and possession. 
  • Form utility is derived from the physical attributes of a product, time utility from its availability when needed, place utility from its accessibility in the desired location, and possession utility from the convenience of ownership. 
  • A decline in the utility of a particular product in the market may indicate the introduction of new technology or upgraded versions, prompting existing companies to adapt and innovate to meet changing consumer demands.

Explained with Example

The economic utility is a term economists use to relate to the satisfaction received after utilizing an item. Upon measuring the economic utility of an item, one can understand if it is accepted or not by the user, hence its impact on demand in the market. Companies more frequently use this term to understand the market performance of their products.

The thirsty individual looks for a glass of water to quench his thirst. This thirst can be quenched by consuming any other liquid like soda, juice, or shake. However, upon consumption, the utility rate for each product will differ.

Economic Utility

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So, assuming the classical approach of measuring economic utility in units, the individual may rate each product by adding units to them – say a glass each of:

·       a) water – 10 units;

·       b) soda – 8 units;

·       c) juice – 7 units and

·       d) shake – 6 units.

Hence, it is seen that each product may have a different utility measure, which may also vary on an individual basis. Based on this type of measurement, companies may try to analyze and understand which product may be more acceptable based on customer requirements.

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Understanding Economic Utility Further

  • Economic Utility gives a relative measure of satisfaction for a product. It relies completely on the needs and preferences of a customer. The product may be assigned its utility based on the customer’s requirement.
  • In the above economic utility example, the individual will consume any or all of the above products only when thirsty. He may not even try any of them if he prefers any particular product. Hence it is important to understand the requirements in markets.
  • For an unknown product yet to be launched, the utility can be “created.” For example, a robot may be an invention by a company, but there is no demand for this product as it is not introduced yet. In such cases, a utility can be created by creating a need for such products amongst customers. The company can make the customers realize changes in today’s lifestyle and how the robot can ease their day-to-day work (or other robot features based on consumer requirements).
  • Economic utility does not always exist with a particular measured unit, even for a particular individual. It is because utility works on requirements and satisfaction levels. For example, an individual is happy with a glass of water and gives it ten units. However, upon being offered a second glass of water, since he is already almost satisfied, he may assign it eight units and keep on reducing its utility with every glass of water. Once a particular product brings satisfaction, it may be possible that the customer may try to find a substitute the next time.
  • Economic Utility is not the same as usefulness. For example, the thirsty individual may consume soda instead of juice or shake based on availability and may assign it a higher utility based on his requirement; however, its usefulness is based on how beneficial it is to the body.

Types of Economic Utility

The four types of Economic Utility that depend on the majority are as follows.

Types of Economic Utility

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 #1- Form – Economic Utility

Different forms of a product may possess (or create) different levels of utility. For example, a plain piece of cloth may be of little use to an individual, and however, when the same piece of cloth is stitched into a dress or a shirt, it may increase its utility manifold. In other cases, the same piece of cloth may be attached to another piece to make something more meaningful, thus creating additional utility.

#2- Time – Economic Utility

Introducing a particular product when a customer is in its need will increase its utility, than at any other time. For example, a loan product may be the best in the market; however, only upon introducing it to a customer when he needs it will create its utility, else it may go waste.

#3- Place – Economic Utility

A product’s utility is maximum only at such a place where its requirement is created. It may find a decent utility in other places, but not the expected level. For example, a camping tent is extremely beneficial in the mountains or at locations where housing is insufficient. In contrast, they may not use such a tent in cities and towns where ample better housing options are available.

#4- Possession – Economic Utility

Once again, utility increases only if the customer possesses a product. Books in a library create utility for the readers; however, one cannot deny that the reader can only possess the book for a short period. There may be a book that the reader may want to possess for a lifetime, but due to other constraints, he is dependent on the library.

Relevance and Uses of Economic Utility

Understanding the utility of a product or service is important from an economic point of view. It may be different in different situations; however, it still gives the products an overall acceptance or rejection.

The economic utility of a product refers to the requirements and expectations of consumers and the loopholes (if any) in its features.

A downward movement in the utility of a particular product in markets may also indicate new technology or upgraded versions being introduced. It acts as an eye-opener to existing companies.

Final Thoughts

Companies should keep a keen eye on the economic utility of their products. The utility may not be a direct indicator of progress or downfall. It may even act like a very slow, fruitful indicator with other perfectly applied parameters. Yet, it gives an overall picture of acceptance (or rejection) to products in an economy. The latest technology and new inventions are required in every economy to be introduced, which depends largely upon the utility of that particular product. In other words, the economic utility is a silent indicator of the growth of the country’s economy.

Frequently Asked Questions (FAQs)

1. How is economic utility different from total utility? 

Economic utility refers to the satisfaction or value that individuals derive from consuming each unit of a product or service. In contrast, total utility represents the overall satisfaction obtained from consuming all units of the product. Economic utility focuses on the satisfaction per unit, while total utility looks at the cumulative satisfaction from consuming multiple units.

2. What factors influence economic utility? 

Various factors influence economic utility, including consumer preferences, tastes, needs, income levels, prices of goods and services, and external influences like advertising and social norms. These factors play a significant role in shaping individuals’ perceptions of the value and desirability of products.

3. Can economic utility be negative?

Yes, the economic utility can be negative. A product failing to meet a consumer’s preferences or expectations can result in dissatisfaction or a negative utility. This negative utility implies that the consumer perceives the product as less valuable or beneficial than other alternatives, leading to a reduced desire to consume it. 

This has been a guide to what Economic Utility is and its definition. Here we discuss the top 4 types of Economic utility along with practical examples. You can learn more about the following articles –

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