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In economics, utility is a measure of the happiness or satisfaction gained from a good or service. U.S. Economic Calendar Economics at the Open Directory Project Economics textbooks on Wikibooks The Economists Economics A-Z Institutions and organizations Bureau of Labor Statistics - from the American Labor Department Center for Economic and Policy Research (USA) National Bureau of Economic Research (USA) - Economics material from the organization...
The concept is applied by economists in such topics as the indifference curve, which measures the combination of a basket of commodities that an individual or a community requests at a given level(s) of satisfaction. The concept is also used in utility functions, social welfare functions, Pareto maximization, Edgeworth boxes and contract curves. It is a central concept of welfare economics. In microeconomics, an indifference curve is a graph showing combinations of two goods to which an economic agent (such as a consumer or firm) is indifferent, that is, it has no preference for one combination over the other. ...
A social welfare function, in welfare economics, is a function which gives a measure of the material welfare of society, given a number of economic variables as inputs. ...
Pareto efficiency, or Pareto optimality, is a central theory in economics with broad applications in game theory, engineering and the social sciences. ...
In economics, an Edgeworth box, named after Francis Ysidro Edgeworth, is a way of representing various distributions of resources. ...
A contract curve is the set of all points in an Edgeworth box that are Pareto efficient. ...
Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocational efficiency of a macroeconomy and the income distribution consequences associated with it. ...
The doctrine of utilitarianism saw the maximisation of utility as a moral criterion for the organisation of society. According to utilitarians, such as Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1876), society should aim to maximise the total utility of individuals, aiming for 'the greatest happiness for the greatest number'. Utilitarianism (from the Latin utilis, useful) is a theory of ethics based on quantitative maximization of some good for society or humanity. ...
Jeremy Bentham (February 15, 1748 – June 6, 1832) was an English gentleman, jurist, philosopher, eccentric, and legal and social reformer. ...
John Stuart Mill (May 20, 1806 – May 8, 1873), aka JS Mill, an English philosopher and political economist, was an influential liberal thinker of the 19th century. ...
Utility theory assumes that humankind is rational. That is, people maximize their utility wherever possible. For instance, one would request more of a good if it is available and if one has the ability to acquire that amount, if this is the rational thing to do in the circumstances. In philosophy, the word rationality has been used to describe numerous religious and philosophical theories, especially those concerned with truth, reason, and knowledge. ...
Cardinal and ordinal utility
There are mainly two kinds of measurement of utility implemented by economists: cardinal utility and ordinal utility.
Utility was originally viewed as a measurable quantity, so that it would be possible to measure the utility of each individual in the society with respect to each good available in the society, and to add these together to yield the total utility of all people with respect to all goods in the society. Society could then aim to maximise the total utility of all people in society, or equivalently the average utility per person. This conception of utility as a measurable quantity that could be aggregated across individuals is called cardinal utility.
Cardinal utility quantitatively measures the preference of an individual towards a certain commodity. Numbers assigned to different goods or services can be compared. A utility of 100 units towards a cup of vodka is twice as desirable as a cup of coffee with a utility level of 50 units.
The concept of cardinal utility suffers from the absence of an objective measure of utility when comparing the utility gained from consumption of a particular good by one individual as opposed to another individual.
For this reason, neoclassical economics abandoned utility as a foundation for the analysis of economic behaviour, in favour of an analysis based upon preferences. This led to the development of tools such as indifference curves to explain economic behaviour. Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...
Preference (or taste) is a concept, used in the social sciences, particularly economics. ...
In microeconomics, an indifference curve is a graph showing combinations of two goods to which an economic agent (such as a consumer or firm) is indifferent, that is, it has no preference for one combination over the other. ...
In this analysis, an individual is observed to prefer one choice to another. Preferences can be ordered from most satisfying to least satisfying. Only the ordering is important: the magnitude of the numerical values are not important except in as much as they establish the order. A utility of 100 towards an ice-cream is not twice as desirable as a utility of 50 towards candy. All that can be said is that ice-cream is preferred to candy. There is no attempt to explain why one choice is preferred to another; hence no need for a quantitative concept of utility.
It is nonetheless possible, given a set of preferences which satisfy certain criteria of reasonableness, to find a utility function that will explain these preferences. Such a utility function takes on higher values for choices that the individual prefers. Utility functions are a useful and widely used tool in modern economics.
A utility function to describe an individual's set of preferences clearly is not unique. If the value of the utility function were to be, e.g., doubled, squared, or subjected to any other strictly monotonically increasing function, it would still describe the same preferences. With this approach to utility, known as ordinal utility it is not possible to compare utility between individuals, or find the total utility for society as the Utilitarians hoped to do. In mathematics, functions between ordered sets are monotonic (or monotone) if they preserve the given order. ...
Utility functions While preferences are the conventional foundation of microeconomics, it is convenient to represent preferences with a utility function and reason indirectly about preferences with utility functions. Let X be the consumption set, the set of all packages the consumer could conceivably consume. The consumer's utility function assigns a happiness score to each package in the consumption set. If u(x) > u(y), then the consumer strictly prefers x to y. Preference (or taste) is a concept, used in the social sciences, particularly economics. ...
Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. ...
For example, suppose a consumer's consumption set is X = {nothing, 1 apple, 1 orange, 1 apple and 1 orange, 2 apples, 2 oranges}, and its utility function is u(nothing) = 0, u(1 apple) = 1, u(1 orange) = 2, u(1 apple and 1 orange) = 4, u(2 apples) = 2 and u(2 oranges) = 3. Then this consumer prefers 1 orange to 1 apple, but prefers one of each to 2 oranges.
In microeconomics models, there are usually a finite set of L commodities, and a consumer may consume an arbitrary amount of each commodity. This gives a consumption set of , and each package is a vector containing the amounts of each commodity. In the previous example, we might say there are two commodities: apples and oranges. If we say apples is the first commodity, and oranges the second, then the consumption set X = and u(0, 0) = 0, u(1, 0) = 1, u(0, 1) = 2, u(1, 1) = 4, u(2, 0) = 2, u(0, 2) = 3 as before. Note that for u to be a utility function on X, it must be defined for every package in X.
A utility function rationalizes a preference relation <= on X if for every , u(x) <= u(y) if and only if x <= y. If u rationalizes <=, then this implies <= is complete and transitive, and hence rational. Preference (or taste) is a concept, used in the social sciences, particularly economics. ...
In mathematics, philosophy, logic and technical fields that depend on them, iff is used as an abbreviation for if and only if. It is often, not always, written italicized: iff. ...
In order to simplify calculations, various assumptions have been made of utility functions.
Risk aversion is a concept in economics and finance theory explaining the behaviour of consumers and investors under uncertainty. ...
Expected utility A von Neumann-Morgenstern utility function assigns a real number to every element of the outcome space in a way that captures the agent's preferences over both simple and compound lotteries (put in category-theoretic language, u induces a morphism between the category of preferences under uncertainty and the category of reals). The agent will prefer a lottery L1 to a lottery L2 if and only if the expected utility (iterated over compound lotteries if necessary) of L1 is greater than the expected utility of L2.
Restricting to the discrete choice context, let be a simple lottery such that L(xi) = pi, where pi is the probability that xi is won. We may also consider compound lotteries, where the prizes are themselves simple lotteries.
The expected utility theorem says that a von Neumann-Morgenstern utility function exists if and only if the agent's preference relation >= on the space of simple lotteries satisfies four axioms: completeness, transitivity, convexity/continuity (also called the Archimedean property), and independence. Preference (or taste) is a concept, used in the social sciences, particularly economics. ...
Completeness and transitivity are discussed supra. The Archimedean property says that for simple lotteries L1 >= L2 >= L3, then there exists a 0 <= p <= 1 such that the agent is indifferent between L2 and the compound lottery mixing between L1 and L3 with probability p and (1-p), respectively. Independence means that if the agent is indifferent between simple lotteries L1 and L2, the agent is also indifferent between L1 mixed with an arbitrary simple lottery L3 with probability p and L2 mixed with L3 with the same probability p.
Independence is probably the most controversial of the axioms.
Daniel Bernoulli has shown how the personal utility vary with the personal degree of risk aversion, itself linked to the initial wealth situation of the person. Daniel Bernoulli Daniel Bernoulli (Groningen, February 9, 1700 – Basel, March 17, 1782) was a Dutch-born mathematician who spent much of his life in Basel, Switzerland. ...
Risk aversion is a concept in economics and finance theory explaining the behaviour of consumers and investors under uncertainty. ...
Discussion and criticism The theory of consumer choice has come under criticism from different angles. One is behavioral economics, where different experiments show that consumers have a higher loss aversion than preference for a related gain. Also, estimations for small probabilities and their utility payoffs are difficult for laypersons to estimate (See Matthew Rabin's homepage for some puzzles connected with consumer theory). Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ...
In prospect theory, loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. ...
Missing image Image:http://emlab. ...
See also The Ellsberg paradox is a paradox in decision theory and experimental economics in which peoples choices violate the axioms of utility theory. ...
Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. ...
Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ...
A qualification introduced by Bentham, to distinguish between two different types of utilities, or, rather, sources of utility (for utility, being identical to pleasure, remains always qualitatively the same). ...
This aims to be a complete list of the articles on economics. ...
Game theory is a branch of applied mathematics that uses models to study interactions with formalised incentive structures (games). Unlike decision theory, which also studies formalized incentive structures, game theory encompasses decisions that are made in an environment where various players interact strategically. ...
Equivalent to efficient market hypothesis and efficient markets theory. ...
The prospect theory was developed by Daniel Kahneman and Amos Tversky in 1979. ...
Risk aversion is a concept in economics and finance theory explaining the behaviour of consumers and investors under uncertainty. ...
A risk premium is the minimum difference between the expected value of an uncertain bet that a person is willing to take and the certain value that he is indifferent to. ...
In microeconomics, the Utility Maximization Problem is the problem consumers face: how should I spend my money in order to maximize my utility? Suppose their consumption set has L commodities. ...
Utility (patent) or industrial applicability is a patentability test. ...
A utility model is an intellectual property right to protect inventions. ...
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