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Utility (economics)

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A hypothetical utility curve. At the 6th unit consumed, welfare was maximized, after that point, it began to diminish.
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Utility is the benefit one receives from consuming some good or service. A major concept in microeconomics, utility can also be thought of as "welfare" or "well-being".[1]

The fundamentals[edit]

Utility can be thought of as anything welfare-enhancing. It may satisfy one's needs, wants, or both. Utility is also highly subjective, and what is utility enhancing for someone may not be for another. Historically, economists have assumed that people are rational utility maximizers. Most economic modeling assumes that consumers and producers strive to make themselves better off, thus the choices they make are in their own self interest, seeking pleasure and avoiding discomfort.

Marginal utility[edit]

Marginal utility is the change in well-being experienced with each additional unit of product consumed.[2] Economists generally argue that utility is subject to the law of diminishing returns. While how much individuals may value a good can differ, they all experience diminishing marginal utility with different goods and services. At a meal the first donut one might eat tastes great, the second is also good, and the 3rd as well. At some point, however, one becomes satiated and eventually tired of donuts. As consumers strive to maximize utility they must balance the costs and benefits with each additional unit of a good or service they buy. This gets into the issue of trade-offs. The utility foregone by buying an additional bottle of wine instead of a case of beer may be compensated by the consumers enjoyment of wine. As preferences vary, and can change rapidly, consumers are constantly making small micro-adjustments to the world around them.

Disutility[edit]

Disutility, or negative utility refers to a situation in which the consumption of a good or service is harmful or welfare-reducing. Some examples might include economic bads, like drugs which cause painful withdrawals or can be overdosed. Standard economic theory states that individuals won't engage in most voluntary transactions unless they see some benefit for themselves.[note 1] So, many types of externalities forcefully "consumed" or experienced like pollution or traffic congestion reduce utility. Labor has also been described as causing disutility, with people often avoiding it, doing as little work as possible.[3]

Quantifying "utils"[edit]

Occasionally economists will refer to "utils" the individual units of well-being. But trying to actually measure utility is difficult. Simply observing people's behaviors and preferences can be very useful for business, researchers, and governments to understand what people want. Indeed, observed preferences are often a better indicator than stated ones.[4][note 2] However, because of issues with qualia, the differences in individual subjective experience, calculating utility in any concrete manner has proven elusive. So under certain conditions, utility can be measured via things like consumer spending behavior. Cardinal utility functions seek to rank the order of people's preferences and measure them accurately.[5]

Non-human utilitarian considerations[edit]

In the 19th century, philosopher Jeremy Bentham recognized that animals experience both pleasure and pain and concluded that their utility should be taken into consideration regarding public policy.[6] In the modern world, animal rights organizations have taken up this cause. Traditionally, some religions, such as certain strains of Hinduism, have recognized the importance of animal welfare.[7] Because of the difficulty in measuring animal well-being, and human society's general tendency to prioritize itself, animal rights and welfare have often been limited or regarded as impractical.

See also[edit]

Notes[edit]

  1. Obvious exceptions being instances where consumers were the victims of fraud.
  2. Social desirability bias is a major issue in surveys. Respondents may feel obligated to say the right thing (under-reporting driving, smoking, watching TV), but when their own time or money is on the line how they spend it can be different.

References[edit]

  1. Chappelow, Jim. "Utility Definition". Investopedia. Retrieved 2020-02-08.
  2. "Marginal utility". Encyclopedia Britannica. Retrieved 2020-02-08.
  3. Knabe, A., & Rätzel, S. (2010). Income, happiness, and the disutility of labour. Economics Letters, 107(1), 77-79.
  4. https://www.sciencedirect.com/topics/economics-econometrics-and-finance/revealed-preferences
  5. Edwards, W. (1954). The theory of decision making. Psychological bulletin, 51(4), 380.
  6. Driver, Julia (2014), Zalta, Edward N. (ed.), "The History of Utilitarianism", The Stanford Encyclopedia of Philosophy (Winter 2014 ed.), Metaphysics Research Lab, Stanford University, retrieved 2020-02-08
  7. "BBC - Religions - Hinduism: Animal ethics". www.bbc.co.uk. Retrieved 2020-02-08.