Utility

Loading the player...

What is 'Utility'

"Utility" is an economic term introduced by Daniel Bernoulli referring to the total satisfaction received from consuming a good or service. The economic utility of a good or service is important to understand because it will directly influence the demand, and therefore price, of that good or service. A consumer's utility is hard to measure, however, but it can be determined indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility.

BREAKING DOWN 'Utility'

Classical economists operate under the assumption that all utilities can be measured as a hard number. To help with this quantitative measurement of satisfaction, the designation of a util was created to represent the amount of psychological satisfaction a specific good or service generates, for a subset of people in various situations.

If, for example, an individual judges that a piece of pizza will yield 10 utils and that a bowl of pasta will yield 12 utils, that individual will know that eating the pasta will be more satisfying. For the producers of pizza and pasta, knowing that the average bowl of pasta will yield 2 additional utils will help them price pasta slightly higher than pizza.

Additionally, utils can decrease as the number of products or services as consumption increases. The first slice of pizza may yield 10 utils, but as more pizza is consumed, the utils may decrease as people become full. This will help consumers understand how to maximize their utility by allocating their money between multiple types of goods and services as well as help companies understand how to structure tiered pricing.

The Definition of Total Utility

Total utility (TU) is defined as the total amount of satisfaction that a person can receive from the consumption of all units of a specific product or service. Using the example above, if a person can only consume three slices of pizza and the first slice of pizza consumed yields 10 utils, the second slice of pizza consumed yields 8 utils and the third slice yields 2 utils, the total utility of pizza would be 20 utils.

TU can be infinite. Its upper boundary is set by the total number of a good or service available for consumption by a consumer.

The Definition of Marginal Utility

Marginal utility (MU) is defined as the additional utility gained from the consumption of one additional unit of a good or service. Using the same example, if the utility of the first slice of pizza is 10 utils and the utility of the second slice is 8 utils, the MU of eating the second slice is 8 utils. If the utility of a third slice is 2 utils, the MU of eating that third slice is 2 utils.

RELATED TERMS
  1. Total Utility

    The aggregate level of satisfaction or fulfillment that a consumer ...
  2. Utilities Sector

    A category of stocks for utilities such as gas and power. The ...
  3. Utility Revenue Bond

    A type of municipal bond that is issued to finance utility projects, ...
  4. Electric Utilities Industry ETF

    An exchange-traded fund that invests in companies which generate ...
  5. Marginal Utility

    The additional satisfaction a consumer gains from consuming one ...
  6. Expected Utility

    An economic term summarizing the utility that an entity or aggregate ...
Related Articles
  1. Markets

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  2. Markets

    Trust In Utilities

    Even in times of economic turmoil, utilities can be a good investment.
  3. Markets

    Are Safe Haven Utility Stocks, ETFs Too Expensive?

    With so many investors seeking safety are utility stocks and ETFs a crowded trade?
  4. Markets

    Explaining Marginal Utility

    Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service.
  5. Markets

    The Debt Report: The Utilities Sector

    Discover how blue chip U.S. utilities companies are using debt, and why it was important for the industry to deleverage after the financial crisis.
  6. ETFs & Mutual Funds

    5 Popular Utilities ETFs in 2016 (XLU, NEE)

    Discover how the five most popular utilities ETFs for 2016 can add growth and income to your portfolio. Four of these utilities ETFs outperformed the S&P 500.
  7. Investing

    Why Utility Stocks Are No Longer a Safe Haven

    Utility stocks have been the best performing sector in the S&P 500 Index so far this year but many believe they are now overvalued.
  8. ETFs & Mutual Funds

    ETF Flows: Utilities ETFs Stand Tall in 2016

    Find out which utilities exchange-traded funds (ETFs) have benefited the most from the huge surge in fund inflows in the early part of 2016.
  9. ETFs & Mutual Funds

    The Top 5 Utility ETFs for 2016 (XLU, IDU)

    Discover the top utility company ETFs, and learn more about how you can get exposure to water, electricity and natural gas utility companies.
  10. ETFs & Mutual Funds

    Utilities ETFs to Date 2016 Performance Review (UPW, FXU)

    Discover the best and worst performing exchange-traded funds (ETFs) within the domestic and international utilities sector year-to-date.
RELATED FAQS
  1. What kind of investors buy utility stocks?

    Take a look at why income investors like utilities, why value investors might like utilities and why growth investors tend ... Read Answer >>
  2. What are the top investing strategies for investing in the utility sector?

    Employ the right strategies when investing in the utility sector, and you can see consistent returns with less risk than ... Read Answer >>
  3. What is the concept of utility in microeconomics?

    Read about the concept of utility in microeconomics, and why economists disagree about the usefulness of cardinal utility ... Read Answer >>
  4. What are the main factors that drive share prices in the utilities sector?

    Learn why the share prices of companies in the utility sector have sensitivity to interest rates and to changes in the amount ... Read Answer >>
  5. What are the different ways that utility is measured in economics?

    Learn about the two methods used to measure the concept of utility and how utility influences other economic models of consumer ... Read Answer >>
  6. What is the utility function and how is it calculated?

    Learn what the utility function is in microeconomic theory and how it is calculated based on a functional form that represents ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center