What is Economic Utility?

Definition: Economic utility is the degree of satisfaction obtained by consuming a given product or service. It measures the level of fulfillment of a particular need.

What Does Economic Utility Mean?

Economic utility is a concept developed to understand how much a given good or service can serve to fulfill the needs of a consumer. The concept has become particularly important ever since classical economics stated that consumers made their purchase decisions rationally, based on obtaining maximum utility. According to this hypothesis, all economic transactions are performed after analyzing the degree of utility gained from each option, and then selecting the one with the highest one. This might sound compelling in theory, but in practice, there are many different types of utility, that means individuals might not be rational in their decisions, but still, their decisions might be taken based on highest utility obtained.

4 Types of Economic Utility

There are basically four types of utility: form, time, place and possession.

Form – Form refers to the particular use of the item being bought, for example, a business might sell blank pages to write, but another business might sell notebooks. So the form in which the pages are presented increases or decreases utility.

Time – Secondly, time, refers to the availability of the product being purchased.

Place – On the other hand, place, is a type of utility determined by the location of the goods or services, and utility increases as the items are more conveniently located for the consumer.

Possession – Finally, possession, measures the value obtained by the consumer from possessing the item.

Example

Let’s say Mr. Montgomery has a dog and wants to be able to walk his dog with a leash. He needs something to tie his dog and a leash will fulfill his need. Nevertheless, the degree in which that leash fulfill his need will depend on the utility he experiences after buying it. By measuring the degree of utility in a scale of a 100, a regular leash might get a 70 in terms of utility, since it serves the purpose but it doesn’t go further than that.

An ergonomic leash, might hit a 80 score, since it provides an additional comfort. Finally, a retractable leash, might be exactly what he is looking for, so the utility of that particular item might provide a score of 100.