Utility function and its characteristics

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

When purchasing a particular product, a person is guided by many principles, the main of which is the utility function of the product. For example, when an individual is hungry, it seems to him that he can eat 10 buns. The first flour product consumed seems incredibly tasty, fresh and melting in the mouth. The second confectionery miracle is still terribly tasty, but no longer so soft. The third bun is a little bland, and the fourth should already be diluted with a drink or tea. Having reached the tenth bakery product, a person realizes that all those buns that he ate are not very tasty and not at all fresh. That is, with each eaten confectionery product, its usefulness decreases. Therefore, we can say with confidence that the fewer buns a person has consumed, the higher the valuable properties of each of them. However, the main goal, namely the relief of hunger, was achieved, which means that the product turned out to be useful. At the same time, the valuable properties of the first bun were much higher than the last.

This law is characterized by such a term as the utility function. It shows that with an increase in the number of goods on the market, their valuable properties are lost, and society no longer wants to buy what is common.massively. That is, there is a direct dependence of such two elements as demand and utility. At the same time, the offer is also of great importance. The higher the level of demand for a particular product, the higher its utility. If the supply of a product exceeds the interest in acquiring it, then its valuable qualities are reduced. Where did such a thing as a utility function come from?

At one time there was an economic school in Austria, whose representatives were the first to try to establish a relationship between such concepts as the price of a product and demand for it, as well as between the quantity of a product and its stocks.

The most prominent scientists of this direction were Menger, Böhm-Bawerk and Vizer. They proved that there is a direct dependence of the price on how much goods are on the market, while the main condition was the limited resources. Representatives of this school proved that there is a pattern between the usefulness of a good and its quantity consumed by people. It was the Austrians who first showed that the valuable functions of a product decrease with an increase in the quantity consumed. This pattern is shown as an example above. At the same time, total aggregate utility increases very slowly, while marginal utility decreases. Based on this observation, the representatives of the Austrian school deduced the main factor influencing the price. And that is marginal utility. The formula for calculating this indicator is as follows:

MU=dU/dQ where

U is the utility function, Q - quantitygoods.

Thanks to the distinction between marginal and total utility, we found the answer to the paradox, which among economists was called the “Water and Diamonds Paradox”. The essence of this issue is as follows. Water should have a greater price for a person than diamonds, because without it society cannot exist, unlike valuable minerals. However, in practice, everything turns out the other way around. The answer lies in the amount of the resource: since the water reserves are huge, the price is correspondingly lower. And diamond deposits are rare, so their value is quite high.