Economic Utility

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 in assessing the purchase decisions and the drivers behind those decisions.

Explained with Example

The economic utility is a term used by economists to relate to the satisfaction received after utilization of 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. This term is more frequently used by companies 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 consumption of any other liquid like soda, juice or maybe a shake. However, upon consumption, the rate of utility 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.

Understanding Economic Utility Further

  • Economic Utility gives a relative measure of satisfaction for a product. Based on the requirement of the customer, the product may be assigned its utility. It relies completely on the need and preferences of a customer.
  • In the above economic utility example, the individual will consume any or all of the above products only when he is thirsty. He may not even try any of them if his preference is any particular product. Hence it is important to understand the requirement in markets.
  • For a product that is unknown and yet to be launched, the utility can be “created”. For example, a robot, which 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 about changes in today’s lifestyle and how the robot can ease out their day to day work (or other features of the robot based on consumer requirements).
  • The Economic utility does not always exist with a particular measured unit even for a particular individual. For example, an individual is happy with a glass of water and gives it 10 units. However, upon being offered a second glass of water, since he is already almost satisfied, he may assign it 8 units, and keep on reducing its utility with every glass of water. This is because utility works on requirements and satisfaction levels. 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 individual who is thirsty 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 4 types of Economic Utility depends 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. A plain piece of cloth may be of little use to an individual, 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 at the time 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. In other places, it may find a decent utility, but not the expected level. For example, a camping tent is extremely beneficial on the mountains or at locations where housing is insufficient; while, such a tent may not be used 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 do create utility for the readers, however, one cannot deny the fact that the reader is allowed to possess the book only for a short period of time. There may be a book which 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

The understanding 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 an overall acceptance or rejection of the products.

The economic utility of a product refers to the requirements and expectations of consumers as well, 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. This 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, and may even act like a very slow indicator which is fruitful only with other parameters being perfectly applied, 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.

This has been a guide to what is Economic Utility 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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