# Utility

After you have worked through this section of the learning unit, you should be able to:

• explain the concepts of utility and cardinal utility

Suppose after a long day of hard work you are hungry. You then consume fish and chips. You probably enjoy the first portion and it satisfies your hunger. You then consume the second portion of fish and chips. Did you enjoy the second portion as much as the first one? Can you tell how much each portion satisfies you?

As consumers, we make decisions on what to buy every day. Economists are of the opinion that consumers buy goods and services to satisfy their needs and wants and that they derive satisfaction from the consumption of these goods and services. This satisfaction they receive is called utility.

Utility is therefore the satisfaction a consumer expects from the consumption of goods or services. The decision of a consumer to demand a good or service is based on the expected satisfaction he or she derives from consuming the good.

### Consider the following questions.

1. If you eat three portions of fish and chips, does the third porting give you the same, more or less satisfaction as the first one?

• Same
• More
• Less

2. Can you put a figure to how much satisfaction you derive from the third portion?

• Yes
• No
• Not sure

I think the third portion would definitely give me less satisfaction than the first. In numerical terms, I could say that the first one gives me 100 feelings of satisfaction and the third only 20 feelings of satisfaction. This is, however, a very subjective measure. It only applies to me.

Economists have developed the concept of cardinal utility to deal with the measurement issue of utility. And they measure this satisfaction or utility in utils. The assumption is that it is possible to place numerical values on utility, an assumption that may seem questionable. You can buy a thermometer for measuring temperature at the hardware store, but what store sells an "utilimometer" for measuring utility? However, while measuring utility with numbers is a convenient assumption to clarify the explanation, the key assumption is not that utility can be measured by an outside party, but only by the individuals themselves. For example, you might indicate that you gain 20 utils from drinking coffee and 15 utils from eating ice cream. Your friend, however, might indicate that he gains 35 utils from drinking coffee and 50 utils from eating ice cream. Even though it is a subjective measure, it is influenced by things such as income and prices.

The reason we buy goods and services is to satisfy our needs and wants. In other words, we buy goods and services because it gives us satisfaction, and what we aim to do is to spend our income, given the prices of goods and services, in such a way that we receive the maximum satisfaction possible. In terms of utils, we want to obtain the highest possible number of utils.

### Utility is best defined as _______

Think again.

Utility is not only influenced by the usefulness of a good or service, but is the satisfaction derived from the consumption of a good or service.

Correct.

Utility is not only influenced by the usefulness of a good or service, but is the satisfaction derived from the consumption of a good or service. Utility is also not the price that a consumer will pay for a good or service, but the satisfaction derived from the consumption of a good or service.

Think again.

Utility is not the price that a consumer will pay for a good or service, but the satisfaction derived from the consumption of a good or service.

### Indicate whether the following statement is true or false:

According to the cardinal utility approach, it is possible to measure utility objectively.

Think again.  The statement is false.

The utility approach is based on the assumption that consumers can assign values to the amount of satisfaction derived from the consumption of a good or service. This assigning of satisfaction, however, is subjective.

Correct.  The statement is indeed false.

The utility approach is based on the assumption that consumers can assign values to the amount of satisfaction derived from the consumption of a good or service. This assigning of satisfaction, however, is subjective.