What Is Utility?

Utility is the total satisfaction or benefit derived from consuming a good or service. Economic theories based on 澳洲幸运5官方开奖结果体彩网:rational choice assume that consumers will strive to maximize their utility. The utility of a good or service directly infl🧜uences an item's demand and its price. Economic models try to quantify or estimate uti﷽lity to determine consumer decision-making.

Utility Theory

The utility definition in 澳洲幸运5官方开奖结果体彩网:economics relates to the concept of usefulness. An economic good yields utility to the extent to which it's useful for satisfying a consumer’s want or need. Various schools of thought diffꦑer as to how to model economic utility and measure the usefulness of a good or service.

Early economists of the Spanish Scholastic tradition of the 1300s and 1400s described the economic value of goods as deriving directly from this property of usefulness and based their theories on prices and monetary exchanges.

Utility in economics was first coined by the noted 18th-century Swiss mathematician Daniel Bernoulli. To 澳洲幸运5官方开奖结果体彩网:Bernoulli and other economists, utility was modeled as a quantifiable or cardinal property of the economic goods that a person consumes.

Measuring Utility

Ordinal Utility: Economists of the Austrian School developed the ordinal theory of utility, the idea that individuals order or rank the usefulness of various units of economic goods. 澳洲幸运5官方开奖结果体彩网:Carl Menger used this framework to resolve the 澳洲幸运5官方开奖结果体彩网:diamond-water paradox: the first available units of any economic good will be put to the most highly valued uses, and subsequent units go to lower-valued uses. The ordinal theory of utility explains the law of diminishing marginal utility and the fundamental 澳洲幸运5官方开奖结果体彩网:laws of supply and demand.&nbs🐷p;In ordinal utility terms, a person with three slices of pizza might eat the first, share the second slice with a friend, and wast✅e the third.

Cardinal Utility: Assumes a “util” represents the amount of satisfaction a specific good or service generates for a subset of people in various situations. The concept of a measurable "util" makes it possible to treat economic theory and relationships using mathematical symbols and calculations. However, “utils” cannot be observed, measured, or compared between different economic goods or between individuals. For example, if ecoꦓnomists determine that a piece of pizza yields 10 ut🗹ils and a bowl of pasta yields 12 utils, individuals will know that eating the pasta will be more satisfying. Producers of pizza and pasta will then price pasta higher than pizza.

Total Utility: If utility in economics is cardinal and measurable, the 澳洲幸运5官方开奖结果体彩网:total utility (TU) is the sum of the satisfaction that a person receives from the consumption of all units of a specific product or service. Usi♏ng the example above, if a person can only consume three slices of pizza and the first slice of pizza consumed yields ten utils, the second slice of pizza consumed yields eight utils, and the third slice yields two utils, the total utility 𝄹of pizza would be twenty utils.

Marginal Utility: This is defined as the additional (cardinal) utility gained from the consumption of one additional unit of a good or service or the additional (ordinal) use that a person has for an additional unit. Using the same example, if the economic utility of the first slice of pizza is ten utils and the utility of the second slice is eight utils, the 澳洲幸运5官方开奖结果体彩网:marginal utility (MU) of eating the second slice is eight utils. If the ꦆutility of a third slice is two utils, the MU of eating that third slice is two utils.

The Bottom Line

Utility can be used to measure the usefulness of goods and services to consumers. While there are limitations when more variables and differences appear in the market, various types of economic utility arꦛe identified. Measuring utility helps companies structure pricing based on the laws of demand. Utility is a term also used to describe the services consumers receiveౠ from energy companies, such as electricity.