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Cryptocurrency: Utility Analysis

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Tariqul Islam
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Consumer’s Equilibrium–Utility Maximization

The theory of demand starts with the examination of consumer’s behavior. In our everyday life we behave in different ways while buying and consuming a good or service.

When we go for shopping, we decide beforehand, what good to buy and how much to spend. We always want more of anything and for that purpose we negotiate and come to an agreed price which we are ready to pay happily. It is therefore, necessary to be first acquainted with the consumer behavior, which forms the basis of the demand theory.

To explain consumer’s equilibrium i.e., how a consumer attains maximum satisfaction by spending his money income on certain units of commodities, it is worthwhile to be familiar with certain terms used in explaining various concepts and theories of demand i.e. Utility, Total Utility, Marginal Utility etc.

Assumption about utility

It is assumed that-

  • Consumers are rational. They always try to maximize satisfaction. That is, to get the maximum welfare by spending the money on various commodities.
  • The satisfaction a consumer gets by consuming a good is also assumed to be measurable (measured in terms of money), though in real life it is not possible.
  • Each consumer is also assumed to be known of what he wants.
  • Each consumer has all information regarding market—the goods available, the prices of the goods at a particular point of time and so on.
  • Every consumer uses this information in such a way as to maximize his total satisfaction.

What is Utility

Utility is defined as the power of a commodity or service to satisfy a human want. Economists have leveled the term satisfaction as utility. It is subjective concept and therefore varies from person to person. As already stated, it resides in one’s mind and therefore cannot be measured in quantitative terms.

Though utility and satisfaction are used synonymously, we should note that utility is the expected satisfaction whereas satisfaction implies ‘realized satisfaction’.

Total Utility

It is the amount of utility (satisfaction); a consumer gets by consuming all the units of a commodity. If there are n units of the commodity then the total utility is the sum of the utilities of all n units of the commodity.

Thus, if there are four units of a commodity, then total utility is,
U = U1 (n1) + U2 (n2) + U3 (n3) + U4 (n4)

Where, U = total utility; U1…….U4 are the utilities of n1…..n4 units of the commodity. Thus, if by consuming first apple, a consumer gets 12 utils of satisfaction, 10 utils from the second apple, 9 utils from the third and 7 utils from the fourth apple; then his total utility is,
U = 12 + 10 + 9 + 7 = 38

Thus utilities of various goods are additive. This means that utilities of different commodities are independent of one another.

The utility derived from one commodity does not affect that of another.

Marginal Utility

Marginal utility is defined as the change in the total utility due to a unit change in the consumption of a commodity per unit of time. It can also be defined as the addition made to the total utility by consuming an additional unit of a commodity.

For example, if total utility of 3 cups of tea is 18 utils and on consuming the 4th cup it rises to 20; then marginal utility 20-18 = 2 utils. ‘Utils’ is the term used by Marshall as a measuring unit of utility. Thus, by consuming one more cup of tea, the additional utility, a consumer gets is 2 utils.

Marginal utility can be expressed as,

Thus, if TU from the second unit (nth unit) of apple is 13 and TU from the previous unit (n-1) is 7, then MU is 13 – 7 = 6.

Relation between Total Utility & Marginal Utility

The concept of total utility and marginal utility is shown in the utility schedule below: when the consumer takes 1st apple, his total utility is 7 and from the 2nd apple he gets 13 and so on. The third column shows marginal utility, which diminishes as the consumer increases units of apples.

It is seen that when total utility is maximum, marginal utility is zero at 8th unit of apple. It is also seen that total utility is the sum of the marginal utilities of the 1st, 2nd, 3rd, and so on.

Thus, at 8th unit of apple,
TU = MU1 + MU2 + MU3 + MU4 +…………..…+ MUn(8) 28 = 7 + 6 + 5 + 4 +…..…+ 0

Law of Diminishing Marginal Utility

One of the very important laws in regard to the satisfaction of human wants is the law of diminishing marginal utility. The law explains common feeling of every consumer.

Suppose a person starts consuming apples one after another. The first apple gives him the maximum satisfaction as he might be in mood of taking some food. As he takes the second apple, he gets less satisfaction because he has already met some level of appetite. The third & more apples yield him lesser satisfaction or utility.

It means that every time the consumer increases his consumption, he gets less & less satisfaction. The satisfaction also tends to be zero when the consumer feels totally disgusted to take any more apples. If he takes more, his satisfaction turns negative or utility now becomes disutility.

Thus law of diminishing marginal utility states that additional satisfaction a person derives by consuming a commodity goes on declining.

Reasons for diminishing marginal utilit

Two important reasons for diminishing marginal utility are the following:

  • Each particular want is satiable (can be satisfied): Though wants are unlimited, a single want can be satisfied. Thus, when a consumer consumes more & more of a commodity, his want is satisfied & he doesn’t wish to have any further increase in the commodity. As such his marginal utility falls when consumption increases.

  • Goods are imperfect substitutes for one another: One good cannot be exactly used in place of another. Satisfaction from any two goods is not same. Different goods satisfy different wants. If a good could be perfectly substituted for another, it would have satisfied other wants. Hence, its marginal utility would not have fallen but increased.

Consumer’s Equilibrium and marginal utility in case of cryptocurrencies

Let me explain marginal utility in case of cryptocurrencies.
Suppose you have ability to invest about $10. Let you observe the price of HBD is at $0.90, than you may buy 11.11 HBD.

But if the price was about $1.2, than you may buy 8.33 HBD.

But the matter is that you will not invest your all amount for purchasing is HBD at a time. You will take a break after purchasing some amount of HBD. Suppose it may be 3 HBD, then you will wait to look at the trand of the exchange rate of his HBD.

If you think it will increase earlier in short range, then you will purchase more. Otherwise the you will not. Eighter if you purchase that currency, the intensity will be decreased and you will purchase less amount that may be about 2 HBD and then 1 HBD.. that is diminishing your utility.

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