Explain the concept of utility in economics.
When studying microeconomics, economists have to be able to explain why we buy the things we buy. This is where the concept of utility comes in. It can help to explain why people buy certain amounts of various goods and services.
The concept of utility has to do with how much value we get from a given purchase. It is not the same thing as usefulness. In economics, we say that something has utility if it gives us any sort of satisfaction. Let us say that I have a whole bunch of t-shirts that fit me well and are comfortable. I do not really need any more. But then I go to a concert that I really loved and I want a t-shirt as a memento. That t-shirt then has utility for me even if, objectively speaking, I did not need it.
The problem with the concept of utility is that it is impossible to measure in any objective way. I really cannot tell you exactly how much that t-shirt is worth to me. Economists have devised a measure called the “util,” but it is not something that can be measured and quantified in any real way.
Utility is the fulfillment an individual gets by consuming a product or a service. In economics, the principle of supply and demand and that of resource scarcity go to determine optimal utility that an individual can access. Utility may in some respect correspond to consumption. For instance, when an individual consumes a high amount of a particular product, this may go to show that they are satisfied or benefit from that product hence increasing their total utility. However, it should be noted that there is no unit for utility like there is for height or weight. Utility like most economic metrics has a threshold or optimum point, where beyond this point the total utility is unaffected by further consumption. This is best explained by the principle of marginal utility which addresses the extra gain in utility for additional consumption of a product or a service.
A large part of economics is studying how consumers can satisfy their unlimited wants with limited means. In that same vein, the utility of an object defines the quantifiable satisfaction that consumption of that object will provide a consumer.
The utility of an object is subject to external conditions. Let's say that on a hot day, I have a choice of drinking two beverages: hot chocolate or cold lemonade. The lemonade will do more to satisfy my thirst than the hot chocolate. Thus, the lemonade has more utility to me.
Once one understands utility, the next logical step is to study indifference curves. Let's say that I am hungry, and I have a choice of eating one hot dog or hamburger. If hot dogs satisfy me more than hamburgers (hot dogs have a greater utility to me than hamburgers), then I will choose to consume them. However, given the choice of eating any combination of six items in total, I will balance the basket of goods that gives me the most utility in total. This could be any basket in which I consumer more or an equivalent amount of hot dogs subject to hamburgers: 6 hot dogs and 0 hamburgers, 5 hot dogs and 1 hamburger, 4 hot dogs and 2 hamburgers, etc. This concept is known as maximizing your utility subject to your indifference curve and teaches us that the utility of an object can change with the quantity consumed.