Utility is certainly a word with which you are familiar. It means useful or handy, as in utility knife or utility trailer. We also use the word utility to describe services provided to the public such as electricity, gas, sewer and water: public utilities.
In the study of economics, however, the word utility takes on a meaning that is specific to this science. In economics, utility describes the amount of satisfaction we gain or lose by consuming a good or service. It is measured mathematically in units called utils. The concept of utility underpins the concepts of scarcity and supply and demand. Utility explains how economic actors, whether individuals or entire economies, seek to gain optimal fulfillment or advantage in dealing with the economizing problem. Perhaps you have seen the slogan "Maximize your utility!" on some of my economics T-shirts.
We cannot speak of utility without speaking of marginal utility, which describes the gain or loss of satisfaction we experience in consuming the next unit of something - the next candy bar, the next bite of a sandwich, etc.
Economists distinguish between marginal utility and total utility, which is the level of satisfaction we gain from consuming several units of a good or service (the next bite of the sandwich = marginal utility, while having eaten the whole sandwich = total utility.
We gained insight into this concept when we conducted the experiment in which, as a volunteer consumed candy bars, we plotted the level of satisfaction each next candy bar gave that fortunate person. We noticed, consistently across trials, that marginal utility declines with each additional unit of consumption. We call this phenomenon diminishing marginal utility.
Marketing experts understand the universality and seriousness of this problem: the more of something we consume, the less satisfaction we get from consuming it. Over time, our level of satisfaction may fall to the point where we stop consuming that particular good or service altogether. We grow "tired of it," "bored with it," or perhaps "fed up with the same old same old."
"New and improved!" "More of what makes it great!" "Bigger, bolder, fresher!" Brighter colors on the package. More product for the same price. A "tweak" in the ingredients, a new design feature on the same old athletic shoes, or one more cup holder in the car... these are some of the tactics that marketing psychologists deploy in an attempt to "reset" the utility meters that all rational people carry around in their skulls. And, I must say, it works remarkably well.
Think of it this way: someone gives you a three-foot-long submarine sandwich. You haven't eaten all day long, and you are terribly hungry. You launch into that sub like a shark into chum and the first bite is like biting into a piece of heaven. the second, third and fourth bites follow so quickly that your brain barely has time to register them. But, after a few more bites, your utility meter tells you that you are starting to get full. Each additional bite tastes just a little less great, and you chew it just a little bit longer. By the time you are halfway through the sub, you are thinking that maybe you should give the rest of it away. And besides, you have nothing to drink! Subs can be pretty mouth-drying, and that just adds to the overall decline in satisfaction you experience.
But just then, a friend walks by. He is a great friend but a rascally fellow who likes to conduct psychological experiments on people, so he says to you, "Hey! I will let you have this tall, cool glass of (insert your favorite beverage here), if you will eat the rest of that sub." Aha! Incentives matter, and sure enough, you suddenly find yourself eating the sub with renewed gusto in anticipation of getting the delicious beverage (another marketing device is to offer a free gift if you purchase a good or service).
If you would like to read further about this concept, there is an excellent article at the AmosWeb website. In fact, you can see how the utility curve works if you click on here. Meanwhile, I hope this article has brought you some utility in your quest for understanding about critical concepts in economics.
In the study of economics, however, the word utility takes on a meaning that is specific to this science. In economics, utility describes the amount of satisfaction we gain or lose by consuming a good or service. It is measured mathematically in units called utils. The concept of utility underpins the concepts of scarcity and supply and demand. Utility explains how economic actors, whether individuals or entire economies, seek to gain optimal fulfillment or advantage in dealing with the economizing problem. Perhaps you have seen the slogan "Maximize your utility!" on some of my economics T-shirts.
We cannot speak of utility without speaking of marginal utility, which describes the gain or loss of satisfaction we experience in consuming the next unit of something - the next candy bar, the next bite of a sandwich, etc.
Economists distinguish between marginal utility and total utility, which is the level of satisfaction we gain from consuming several units of a good or service (the next bite of the sandwich = marginal utility, while having eaten the whole sandwich = total utility.
We gained insight into this concept when we conducted the experiment in which, as a volunteer consumed candy bars, we plotted the level of satisfaction each next candy bar gave that fortunate person. We noticed, consistently across trials, that marginal utility declines with each additional unit of consumption. We call this phenomenon diminishing marginal utility.
Marketing experts understand the universality and seriousness of this problem: the more of something we consume, the less satisfaction we get from consuming it. Over time, our level of satisfaction may fall to the point where we stop consuming that particular good or service altogether. We grow "tired of it," "bored with it," or perhaps "fed up with the same old same old."
"New and improved!" "More of what makes it great!" "Bigger, bolder, fresher!" Brighter colors on the package. More product for the same price. A "tweak" in the ingredients, a new design feature on the same old athletic shoes, or one more cup holder in the car... these are some of the tactics that marketing psychologists deploy in an attempt to "reset" the utility meters that all rational people carry around in their skulls. And, I must say, it works remarkably well.
Think of it this way: someone gives you a three-foot-long submarine sandwich. You haven't eaten all day long, and you are terribly hungry. You launch into that sub like a shark into chum and the first bite is like biting into a piece of heaven. the second, third and fourth bites follow so quickly that your brain barely has time to register them. But, after a few more bites, your utility meter tells you that you are starting to get full. Each additional bite tastes just a little less great, and you chew it just a little bit longer. By the time you are halfway through the sub, you are thinking that maybe you should give the rest of it away. And besides, you have nothing to drink! Subs can be pretty mouth-drying, and that just adds to the overall decline in satisfaction you experience.
But just then, a friend walks by. He is a great friend but a rascally fellow who likes to conduct psychological experiments on people, so he says to you, "Hey! I will let you have this tall, cool glass of (insert your favorite beverage here), if you will eat the rest of that sub." Aha! Incentives matter, and sure enough, you suddenly find yourself eating the sub with renewed gusto in anticipation of getting the delicious beverage (another marketing device is to offer a free gift if you purchase a good or service).
If you would like to read further about this concept, there is an excellent article at the AmosWeb website. In fact, you can see how the utility curve works if you click on here. Meanwhile, I hope this article has brought you some utility in your quest for understanding about critical concepts in economics.