Utility

Utility is a term used in economics to represent the satisfaction or happiness derived from consuming a good or service. The concept of utility is used to explain the behavior of consumers and the decisions they make in the market.

Concept of Utility

The concept of utility was introduced by Jeremy Bentham, a British philosopher and economist. He proposed that all actions are driven by the desire to maximize pleasure and minimize pain, a principle he called Utilitarianism. In economics, this principle is applied to consumer behavior, with the assumption that consumers aim to maximize their utility when choosing how to spend their income.

Utility can be either cardinal or ordinal. Cardinal utility assumes that the satisfaction derived from consumption can be measured in numerical units, while ordinal utility assumes that satisfaction can only be ranked in terms of more or less.

Measurement of Utility

There are two main methods of measuring utility: the marginal utility approach and the indifference curve approach. The marginal utility approach measures the additional satisfaction gained from consuming one more unit of a good or service. The indifference curve approach, on the other hand, measures the combinations of two goods that give the consumer the same level of satisfaction.

Utility Function

A utility function is a mathematical representation of a consumer's preference ordering over a set of goods and services. The utility function assigns a numerical value to each possible choice, with higher values representing preferred choices.

Law of Diminishing Marginal Utility

The law of diminishing marginal utility states that as a person increases consumption of a product, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

See Also

• Consumer Theory
• Demand Curve
• Indifference Curve
• Marginal Utility
• Ordinal Utility
• Cardinal Utility

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