Utility Study

Coca-Cola Is an international brand that are consumed everyday all around the world. Statistical has shown that each day, more than 8 million can of Coca-Cola Is being sold worldwide. However today we are not going to discuss about the secret behind Coca-Cola success. On the other hand we are going to move from production to consumer where discussion will be about the utility of Coca-Cola. Every customer has their own satisfaction level, and it is different with each other. Each item that we purchase, regardless if it Is food, equipments, clothes, house, cars ND phones has their own level of consumer satisfaction.

This explains why some consumers are willing to purchase stuff that have almost the same value, but with different prices. The terms used to describe such phenomenon is utility. Utility is defined as the “satisfaction gained by consumers from consumption of goods and services” or it can also be defined as the “ability of a good to provide satisfaction to its customers. ” From the definition, we can declare that before a customer purchase a good or services, they used satisfaction level as the guideline to assist them In making decision of purchasing.

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After purchasing, the evaluation level is also based on the satisfaction level when they are enjoying the product or services. Back to the Coca-cola. Consumers are willing to pay ARM 2 for a can of Coca-Cola. The main reason for a consumer to purchase Coca-cola is because they are thirsty and they like the taste that the Coca-cola can provide them with. Thus, we can conclude that the consuming Coca-Cola provide high utility as everyone seems to keep corning back for more Coca-cola regardless of the ages of the consumers. There are 2 method that can be used to calculate utility.

Cardinal utility and Ordinal utility ill be discussed further in the next section. The 2 basic method in measuring utility are Cardinal utility method and Ordinal utility method. 2. 1 : cardinal utility Method Length can be measured in meter, weight can be measured in kilogram, and even chemical composition can be measured in unit mole. But how do we measure the utility? Towed even have the right unit for the measurement? Therefore, cardinal utility is method that assume the satisfaction of purchasing a product or services can be measured using the unit of “dull”.

Cardinal method, Introduced by Alfred Marshall, takes us back to primary school when we discuss about math. Let’s go back to Coca-cola for the example. Let’s say every can of Coca-cola provides 15 ITIL. While a can of X branded carbonated cola provide 8 ITIL, we can conclude that a Coca- cola has a higher utility value than X branded cola carbonated drink simply because it provides more ITIL when it comes to consumption. In usual occasion, utility is measured using the price that a person Is willing to pay for the Item.

The higher the that the item can provide higher satisfaction to the customers. Total utility is defined s the total satisfaction gained from a given level of consumption of goods, while marginal utility means the increase in total utility when consumption is increased by 1 unit. Marginal utility changes from continuous consumption of an item. Marginal utility is calculated by dividing the changes in total utility with the changes in quantity consumed. Quantity (Coca – Cola taken) Total Utility Marginal Utility 1 1515 2 3015 3 4010 4 48 8 TABLE 2. : Table shows the difference between marginal utility with increasing consumption of Coca – Cola From the table above, we understand that with the increase consumption of each Coca – Cola, the total utility increase from time to time. But as we notice, the marginal utility is dropping. Based on the assumption, when we consume more Coca – Cola, we are satisfied with each sip of it, but when we consume too much, the level of satisfaction decrease from time to time. This can be explained further if we were to drink water after sport immediately.

We felt good when we drink a lot of water right after sport, but after a while, when we are not that tired anymore, the water that we consume does not provide the same level of satisfaction as it did ruing the first few sip, thus explained the marginal utility of an item consumption. GRAPH 2. 1 : Graph Shows the Increasing in Total Utility with Increasing Consumption of Coca – Cola GRAPH 2. 2: Graph shows the changes in Marginal Utility with Increasing Consumption of Coca – Cola 2. 2: Ordinal Utility Method Ordinal Utility method suggests that we should make comparison before we decide the utility of an item.

We cannot measure the ITIL in quantitative form as it cannot be measured that way. Thus, with that definition in mind, it slowly leads to the need for us to differentiate between Choice and Priority. Choice, as we always define it is what we always wanted, regardless whether we are able to afford it or not. Priority is something that we have to compare which is more important or needed before we decide to get it. Priority always comes with factors such as the ability to own the item in terms of finance. Indifference curve is something that are used by users to assist their decision making on an item.

The theory of indifference curve suggests that we to the supermarket and we found a pack of apple, with all same quality and size. Option A has 6 apples in it, with a price of ARM 5, while option B has a pack of 9 apples n it, with the price of ARM 5 as well. Thus, with indifference curve, we decide that the second option is better when there are more apple in it compared to the other pack. The example shows he indifference curve that happened almost every day in our life. GRAPH 2. 3: Graph Shows the dot where Option A and option B for apples has been chosen. .What are the differences between cardinal and ordinal theories? The main differences between cardinal and ordinal theory can be explained by the valuation of satisfaction, the order mechanism, measurement of satisfaction, and . 1: Valuation of Satisfaction (Utility) Cardinal and ordinal utility have different type of valuation of satisfaction. As mentioned previously, Cardinal utility method used the unit ITIL to evaluate the satisfaction of a person who are consuming a product or services.

In cardinal utility method, quantitative method is used where numbers are being used as a way to compare how something can satisfy the consumer. For example, an ‘phone can provide 500 ITIL to a user, whereas a Samsung SO can provide 450 ITIL to a consumer, thus people will be more prompt to purchase phone instead of Samsung due to the sigh ITIL that ‘phone can provide. It is Just as simple as that a person can actually use cardinal utility method to measure the satisfaction of purchasing an item. The continuation however, is based on the marginal utility and total utility.

The total utility will be increasing, but most of the time, the marginal utility of a person towards a product will decrease due to lowering satisfaction that the consumer felt toward the item. Thus, cardinal utility method obey the Law of diminishing marginal utility where at some point, the item can no longer be able to increase the total utility f a consumer, thus diminish the ability to provide satisfaction of the item to the consumers. On the other hand, ordinal utility method utilizes the importance of comparison in order to make the user realize which product is better.

If item 1 is better than item 2, then item 2 has higher utility value and consumers will be prompt to go toward item 2 more, instead of item 1 . Ordinal utility method also suggested that the benefit of satisfaction gained by consumers cannot be measured in quantitative form, thus eliminating the power that has been granted to the cardinal utility method, which calculate utility using the unit ITIL. . 2: Order Mechanism In cardinal utility method, the consumption of goods and services that provide higher service are accorded with higher utile.

By using the utile, deduction are made and observation are done in various way to check the availability of the item to satisfy the consumer more. On the other hand, in ordinal utility, the consumption of goods and services does not provide the data to accord whether the product has higher utile or not. Ordinal utility will immediately categorize the consumption that provides higher utile as the consumption that are better. For example, if I were to purchase an apple ND orange, and the apple provide more satisfaction to me.

Cardinal utility will apple provide more satisfaction to me. 3. 3: Total Utility and Marginal Utility In cardinal utility, there is a law of diminishing of marginal utility that suggest an item will not be able to satisfy the consumer any longer if the total utility of consuming an item does not change after reaching a level. This point of consuming an item will make a constant total utility and O marginal utility as it is no longer able to increase the satisfaction. For example, if eating NASA lemma makes u feel happy at iris, the second bowl can still provide more satisfaction.

However, as the number increase, if you were to reach the 10th bowl of NASA lemma, eating more will not increase your satisfaction. Thus, at this point, the satisfaction is diminished and gone from the calculation. Different case is happening in ordinal utility method. Ordinal utility method does not have such calculation. Ordinal utility method only suggest that if an item provide more satisfaction than the other, thus, the item has more utility value than the one with less utility value. There are no such thing as increasing r decreasing total utility and marginal utility in ordinal utility method.

Ordinal utility simple suggest that the comparison of an item is the decisive factor to provide better utility to the user. 3. 4: Consumer Equilibrium For ordinal utility, there exist a point on the graph called consumer equilibrium where indifference curve and budget line graph cross each other. At such point, consumer can both afford and is satisfied with the choice that they made. Indifference curve shows us about the choice and priority where the consumer are satisfied with, while budget line show us the limit on how much we can afford a reduce.

Thus, when the point cross between the 2 lines, it shows that we are both satisfied with the product and are able to afford the item. It is different for cardinal utility. In cardinal utility, there is no mention of consumer equilibrium. Cardinal utility is used to calculate the willingness and the satisfaction that a product or services can provide in when the consumption of an item is increasing from time to time. Cardinal utility also did not discuss about the budget line where the affordability of a consumer is being taken as a factor.