Utility

Theory

Brugger, Brendon ( Cardinal Utility )

Cablitas, John Michael (Utility Approach)

Bracino, Matthew ( Cardinal Utility )

Octaviano, Keith Loiuse (Ordinal Utility)

Medina, Joyce Ann (Utility Theory)

"Utility Theory"

Utility theory bases its beliefs upon individuals’ preferences. It is a theory postulated in
economics to explain behavior of individuals based on the premise people can consistently rank
order their choices depending upon their preferences. Each individual will show different
preferences, which appear to be hard-wired within each individual. We can thus state that
individuals’ preferences are intrinsic. Any theory, which proposes to capture preferences, is, by
necessity, abstraction based on certain assumptions.

The philosopher and jurist Jeremy Bentham (1748-1832) was born in Spitalfields,
London, on 15 February 1748.

UTILITY – is a term in economics that refers to the total satisfaction received from consuming a
good or service.

TYPES OF UTILITY
1. Form
2. Place
3. Timer
4. Service
5. Posession
6. Knowledge
7. Natural Utility

FORM UTILITY
- It involves changing raw materials into usable goods or putting parts together to make them
more useful

PLACE UTILITY
- Having a product where customer can buy.

TIME UTILITY
- Having a product or service available at a certain time of year or a convenient time of day.

SERVICE UTILITY
- It is the service to provide for the consumers. Such are services provided by professionals in the
society to other people in the society

POSSESSION UTILITY
- The exchange of a product for money
Utility function

— a mathematical formulation that ranks the preferences of the individual in terms of

satisfaction different consumption bundles provide. Thus, under the assumptions of utility theory,
we can assume that people behaved as if they had a utility function and acted according to it.
Therefore, the fact that a person does not know his/her utility function, or even denies its
existence, does not contradict the theory. Economists have used experiments to decipher
individuals’ utility functions and the behavior that underlies individuals’ utility.

CARDINAL UTILITY

Cardinal Utility is the idea that economic welfare can be directly observable and be given
a value.

The idea of cardinal utility is important to rational choice theory. The idea consumers make
optimal choices to maximise their utility.

DEMAND CURVE OF CARDINAL UTILITY

For example, people may be able to express the utility that consumption gives for certain goods.
For example, if a Nissan car gives 5,000 units of utility, a BMW car would give 8,000 units. This
is important for welfare economics which tries to put values on consumption. For example,
allocative efficiency is said to occur when

Marginal cost = Marginal Utility.

ORDINAL UTILITY

In ordinal utility, the consumer only ranks choices in terms of preference but we do not give
exact numerical figures for utility.

For example, we prefer a BMW car to a Nissan car, but we don’t say by how much.

It is argued this is more relevant in the real world. When deciding where to go for lunch, we may
just decide I prefer an Italian restaurant to Chinese. We don’t calculate the exact levels of utility.

Carl Menger, an Austrian economist, developed concepts of utility which rested on ranked
preferences.
MARGINAL UTILITY

Marginal utility quantifies the added satisfaction that a consumer garners from
consuming additional units of goods or services. The concept of marginal utility is used by
economists to determine how much of an item consumers are willing to purchase.

The law helps to explain the phenomenon in value theory that the price of a commodity falls
when its supply increases. It is because with the increase in the stock of a commodity, its
marginal utility diminishes.

LAW OF DIMINISHING MARGINAL UTILITY

The Law Of Diminishing Marginal Utility states that all else equal as consumption
increases the marginal utility derived from each additional unit declines. Marginal utility is
derived as the change in utility as an additional unit is consumed. Utility is an economic term
used to represent satisfaction or happiness.

TOTAL UTILITY

Total utility is the aggregate summation of satisfaction or fulfillment that a consumer

receives through the consumption of goods or services. Total utility is usually defined as a
quantifiable summation of satisfaction or happiness obtained from consuming multiple units of a
particular good or service. Utility and total utility are used in economic analysis of consumer
behaviors within a marketplace.
To find total utility economists use the following basic total utility formula: TU = U1 + MU2 +
MU3 … The total utility is equal to the sum of utils gained from each unit of consumption. In the
equation, each unit of consumption is expected to have slightly less utility as more units are
consumed.