Utility

Concept in economics

Utility is a concept in economics that refers to the satisfaction or benefit derived by consuming a product or service. It is a central idea in microeconomics and is used to model consumer behavior.

Overview

Utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. Economists use utility to understand how individuals make choices and allocate their resources. The concept is crucial in the analysis of consumer choice and demand.

Types of Utility

There are several types of utility, including:

• Total Utility: The total satisfaction received from consuming a certain quantity of goods or services.
• Marginal Utility: The additional satisfaction gained from consuming one more unit of a good or service. It is a key concept in the law of diminishing marginal utility, which states that as a person consumes more units of a good, the additional satisfaction from each additional unit decreases.

Utility Functions

Utility functions are mathematical representations of consumer preferences. They are used to model how consumers rank different bundles of goods. A common form of utility function is the Cobb-Douglas utility function, which assumes that utility is a function of the quantities of two or more goods.

Indifference Curves

A simple diagram of an indifference curve

Indifference curves are graphical representations of different combinations of goods between which a consumer is indifferent. Each point on an indifference curve represents a combination of goods that provides the same level of utility to the consumer. Indifference curves are typically downward sloping and convex to the origin, reflecting the assumption of diminishing marginal rates of substitution.

Budget Constraint

General version of a budget constraint

The budget constraint represents the combinations of goods and services that a consumer can purchase given their income and the prices of goods. It is a fundamental concept in consumer theory, as it illustrates the trade-offs that consumers face. The budget line is typically drawn as a straight line on a graph where the axes represent quantities of two goods.

Applications

Utility theory is applied in various fields such as welfare economics, where it is used to assess the well-being of individuals and societies. It is also used in game theory to model strategic interactions between rational agents.

Criticisms

Utility is a subjective measure and can be difficult to quantify. Critics argue that it oversimplifies human behavior and does not account for factors such as emotions and social influences.

Related pages

• Consumer theory
• Demand curve
• Marginal utility
• Indifference curve

References

• Varian, Hal R. Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.
• Mas-Colell, Andreu, Michael D. Whinston, and Jerry R. Green. Microeconomic Theory. Oxford University Press.

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  Indifference Curve Diagram

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  Budget Constraint Diagram