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Household Behavior and Consumer Choice
The Basis of Choice: Utility

The budget constraint, only half of the picture; it shows us what consumers are able to buy. But demand is made up of the ability to buy things and the desire to buy things. Economists capture the peculiarities of each person’s taste and desire with a concept called utility, which is a measure of pleasure or happiness. Utility is treated as if it were measurable; as if one could strap a machine on to his or her head and a digital readout would tell you how many utils (the unit of measurement for utility) one gets from specific actions. The reality is that there is no such machine, and so we must be very careful when using numbers to represent utility.

To develop your understanding of utility and the law of demand, try the Active Graph exercise.

active_mini.jpgActive Graph Level 1: Diminishing Marginal Utility and the Law of Demand

Utility is an ordinal measure. Therefore, the actual numbers that measure utility do not matter, just the order of the numbers. For example, you could say that you get 10 utils from watching television and 20 utils from reading. This statement is identical to saying that you get 50 utils from watching television and 100 utils from reading. The actual number of utils is not important; what is important is that you get twice as much utility from reading as you do from watching television. Since the number of utils is not directly meaningful, it is impossible to compare utility between two different people. It can only compare utility between different goods for one person.

Consider eating a bag of M&M candies one at a time. Each M&M candy gives you a certain pleasure or happiness. Utility is specific to that individual candy. Let us say that we will assign the first M&M as giving you 50 utils. The second M&M is not as good as the first one, so it gets a utility of 45. By the third one, you are only getting 35 utils from it. The total utility you get from consuming 3 M&Ms is equal to 50 + 45 + 35 = 130 utils. The total utility is the total pleasure from consumption of a good or service and is the product of each unit consumed added together. Thus, the total utility from two M&Ms is 95 utils. Marginal utility is the additional utility from consuming one more unit of something. Since we got zero utility when consuming zero M&Ms, the first M&M gave us an additional utility of 50 utils.

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