utility

Examples of utility in the following topics:

• Principle of Diminishing Marginal Utility

  • This is a simple illustration of diminishing marginal utility .
  • While there are some circumstances where there will always be some marginal utility to producing or consuming more of a good, there are also circumstances where marginal utility can become negative.
  • This concept suggests a uniform steady decline of marginal utility, but that may not always be the case.
  • While utility may increase for a period, there is usually a "tipping point" where afterwards marginal utility decreases.
  • Getting a third ticket for your date will have low marginal utility than the second.

• Marginal Utility

  • Marginal utility of a good or service is the gain from an increase or loss from a decrease in the consumption of that good or service.
  • A person should produce or purchase an additional item when the marginal utility exceeds the marginal cost .
  • Marginal utility is measured on a per unit basis.
  • When evaluating the marginal utility of any item, it is important to know in what unit utility is measured.
  • The marginal utility of owning a second house is likely less than the marginal utility of owning the first house.

• Defining Utility

  • The utility of any object or circumstance can be considered.
  • Ordinal utility ranks a series of options in order of preference.
  • An example of a statement reflecting ordinal utility is that "I would rather read than watch television. " Generally, ordinal utility is the preferred method for gauging utility.
  • Cardinal utility also ranks a series of options in order of preference, but it also measures the magnitude of the utility differences.
  • An example of a statement reflecting cardinal utility is "I would enjoy reading three times more than watching television. " Given how difficult it is to precisely measure preference, cardinal utility is rarely used.

• The Allocation Problem

  • This can be expressed as a mathematical statement, US = f(UA, UB, . . . , UN), where US represents the total utility of society, UA is the utility of individual A (Adam), UB is the utility of individual B (Barbara) and UN is the utility of the Nth individual.
  • "The utility of society is a function (f) of the utilities of the individuals."
  • The utility of society is the sum of the individuals' utilities.
  • +UN "the welfare or utility of society is the sum of the utility obtained by each individual."
  • If the individuals' utility functions are interdependent (my welfare or utility is affected by your utility), the utilities cannot be summed.

• Economic objectives

  • In a simplistic world, the welfare or utility of the community is the sum of the utilities or each member of that society.
  • Therefore, if each individual maximizes their utility it will maximize the utility of the group.
  • The maximization of each individual's utility is consistent with the maximization of the utility of society.
  • Since it is not possible to measure utility, welfare or happiness, utility is connected to variables that can be measured.
  • The inability to measure utility also leads to the use of price as a proxy.

• Theory of Utility

  • The theory of utility states that, all else equal, a rational person will always choose the option that has the highest utility.
  • The theory of utility is based on the assumption of that individuals are rational.
  • In economics, an individual is "rational" if that individual maximizes utility in their decisions.
  • Whenever an individual is to choose between a group of options, they are rational if they choose the option that, all else equal, gives the greatest utility.
  • Recalling that utility includes every element of a decision, this assumption is not particularly difficult to accept.

• Optimization of consumption

  • It means making the most of our limited resources to maximize our utility.
  • One can equivalently refer to each point on the indifference curve as rendering the same level of utility for the consumer.
  • That is, the indifference curve tangent to the budget constraint represents the maximum utility obtained utilizing the entire budget of the consumer.
  • The tangent point represents the amount of goods the consumer should purchase to fully utilize their budget to obtain maximum utility.
  • Instead of comparing two single goods, you can construct the indifference curve so it compares the utility of one good with the utility of a composite of all other goods.

• Introduction to Demand and Consumer Behavior

  • In Neoclassical microeconomics, the objective of the consumer is to maximize the utility that can be derive given their preferences, income, the prices of related goods and the price of the good for which the demand function is derived.
  • There are two approaches that may be used to explain an individual's demand function; utility analysis and indifference analysis.

• Voluntary Exchange

  • Any alternative that will improve the welfare or utility of at least one person without decreasing the welfare or utility of another person would increase the welfare of society.
  • He and many of his followers attempted to find a way to quantify utility and use it for decision-making.
  • However, it is not possible to make interpersonal comparisons of utility, i.e. if each of 100 persons is given one Euro (€) each there is no reason to believe that they would all get the same utility.
  • Information on the preferences of all individuals is not held in one central place, utility cannot be measured and summed, so it is impossible to redistribute cola and tea by eminent domain and insure an increase in total utility.
  • Voluntary exchange is believed to increase the utility of the members of society.

• Properties of Indifference Curves

  • Indifference curves trace the combination of goods that would give a consumer a certain level of utility.
  • Indifference curves allow economists to predict consumer purchasing behaviors based upon utility maximization for a bundle of goods within the context of a given consumer's budget constraints and preferences.
  • This demonstrates that increasingly high quantities of one good over another have a cost in respect to their overall utility per unit (diminishing returns).
  • Combining these various properties, one can highlight a number of critical implications of consumer purchasing behavior and the concept of utility.
  • Consumers naturally desire a bundle of goods that is varied (hence the convex curves for most comparisons) in order to maximize their utility.