economics, utility is a measure of the happiness or satisfaction
gained from a good or service. 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.
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'.
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.
Cardinal and Ordinal Utility
are mainly two kinds of measurement of utility implemented by economists:
cardinal utility and ordinal 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.
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 coffee is twice as desirable
as a cup of tea with a utility level of 50 units.
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
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
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.
utility function to describe an individual's set of preferences clearly is not
unique. If the value of the utility function were to be, for 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.