utility

a company that performs a public service

subject to government regulation the quality of being of practical use the service (electric power or water or transportation) provided by a public utility

"the cost of utilities never decreases"

"all the utilities were lost after the hurricane" (economics) a measure that is to be maximized in any situation involving choice (computer science) a program designed for general support of the processes of a computer

"a computer system provides utility programs to perform the tasks needed by most users" a facility composed of one or more pieces of equipment connected to or part of a structure and designed to provide a service such as heat or electricity or water or sewage disposal

"the price of the house included all utilities" used of beef

usable but inferior capable of substituting in any of several positions on a team

"a utility infielder"

otheruses In economics, utility is a measure of the happiness or satisfaction gained from a good or service. The concept is applied by economists in such topics as the indifference curve, which measures the combination of a basket of commodities that an individual or a community requests at a given level(s) of satisfaction. The concept is also used in utility functions, social welfare functions, Pareto efficiencyPareto maximization, Edgeworth boxes and contract curves. It is a central concept of welfare economics.The doctrine of utilitarianism saw the maximisation of utility as a moral criterion for the organisation of society. According to utilitarians, such as Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1876), society should aim to maximise the total utility of individuals, aiming for 'the greatest happiness for the greatest number'.Utility theory assumes that humankind is rationalityrational. That is, people maximize their utility wherever possible. For instance, one would request more of a good if it is available and if one has the ability to acquire that amount, if this is the rational thing to do in the circumstances.

Cardinal and ordinal utility - There are mainly two kinds of measurement of utility implemented by economists: cardinal utility and ordinal utility.Utility was originally viewed as a measurable quantity, so that it would be possible to measure the utility of each individual in the society with respect to each good available in the society, and to add these together to yield the total utility of all people with respect to all goods in the society. Society could then aim to maximise the total utility of all people in society, or equivalently the average utility per person. This conception of utility as a measurable quantity that could be aggregated across individuals is called cardinal utility.Cardinal utility quantitatively measures the preference of an individual towards a certain commodity. Numbers assigned to different goods or services can be compared. A utility of 100 units towards a cup of vodka is twice as desirable as a cup of coffee with a utility level of 50 units.The concept of cardinal utility suffers from the absence of an objective measure of utility when comparing the utility gained from consumption of a particular good by one individual as opposed to another individual.For this reason, neoclassical economics abandoned utility as a foundation for the analysis of economic behaviour, in favour of an analysis based upon preferences. This led to the development of tools such as Indifference curveindifference curves to explain economic behaviour. In this analysis, an individual is observed to prefer one choice to another. Preferences can be ordered from most satisfying to least satisfying. Only the ordering is important: the magnitude of the numerical values are not important except in as much as they establish the order. A utility of 100 towards an ice-cream is not twice as desirable as a utility of 50 towards candy. All that can be said is that ice-cream is preferred to candy. There is no attempt to explain why one choice is preferred to another; hence no need for a quantitative concept of utility.It is nonetheless possible, given a set of preferences which satisfy certain criteria of reasonableness, to find a utility function that will explain these preferences. Such a utility function takes on higher values for choices that the individual prefers. Utility functions are a useful and widely used tool in modern economics.A utility function to describe an individual's set of preferences clearly is not unique. If the value of the utility function were to be, e.g., doubled, squared, or subjected to any other strictly monotonically increasing function, it would still describe the same preferences. With this approach to utility, known as ordinal utility it is not possible to compare utility between individuals, or find the total utility for society as the Utilitarians hoped to do.

Utility functions - While preferences are the conventional foundation ofmicroeconomics, it is convenient to represent preferences with a utility function and reason indirectly about preferences with utility functions. Let X be the consumption set, the set of all packages the consumer could conceivably consume.The consumer's utility function $u\; :\; X\; \backslash rightarrow\; \backslash textbf\; R$ assigns a happiness score to each package in the consumption set. If u(x) > u(y), then the consumer strictly prefers x to y.For example, suppose a consumer's consumption set is X = , and its utility function is u(nothing) = 0, u(1 apple) = 1, u(1 orange) = 2, u(1 apple and 1 orange) = 4, u(2 apples) = 2 and u(2 oranges) = 3. Then this consumer prefers 1 orange to 1 apple, but prefers one of each to 2 oranges.In microeconomics models, there are usually a finite set of L commodities, and a consumer may consume an arbitrary amount of each commodity. This gives a consumption set of $\backslash textbf\; R^L\_+$, and each package $x\; \backslash in\; \backslash textbf\; R^L\_+$ is a vector containing the amounts of each commodity. In the previous example, we might say there are two commodities: apples and oranges. If we say apples is the first commodity, and oranges the second, then the consumption set X = $\backslash textbf\; R^2\_+$ and u(0, 0) = 0, u(1, 0) = 1, u(0, 1) = 2, u(1, 1) = 4, u(2, 0) = 2, u(0, 2) = 3 as before. Note that for u to be a utility function on X, it must be defined for every package in X.A utility function $u\; :\; X\; \backslash rightarrow\; \backslash textbf$ rationalizes a preference relation <= on X iffor every $x,\; y\; \backslash in\; X$, u(x) <= u(y) if and only if x <= y. If u rationalizes <=, then this implies <= is complete and transitive, and hence rational.In order to simplify calculations, various assumptions have been made of utility functions.

CES (''constant elasticity of substitution'') utility is one with constant relative risk aversion

quasilinear utility

homothetic utility

Expected utility - A von Neumann-Morgenstern utility function $u\; :\; X\; \backslash rightarrow\; \backslash textbf$ assigns a real number to every element of the outcome space in a way that captures the agent's preferences over both simple and compound lotteries (put in category-theoretic language, $u$ induces a morphism between the category of preferences under uncertainty and the category of reals). The agent will prefer a lottery $L\_1$ to a lottery $L\_2$ if and only if the expected utility (iterated over compound lotteries if necessary) of $L\_1$ is greater than the expected utility of !$L\_2$.R estricting? to the discrete choice context, let $L\; :\; X\; \backslash rightarrow0,1$ be a simple lottery such that $L(x\_i)\; =\; p\_i$, where $p\_i$ is the probability that $x\_i$ is won. We may also consider compound lotteries, where the prizes are themselves simple lotteries.The expected utility theorem says that a von Neumann-Morgenstern utility function exists if and only if the agent's preference relation on the space of simple lotteries satisfies four axioms: completeness, transitivity, convexity/continuity (also called the Archimedean property), and independence.Completeness and transitivity are discussed supra. The Archimedean property says that for simple lotteries $L\_1\; \backslash geq\; L\_2\; \backslash geq\; L\_3$, then there exists a $0\; \backslash leq\; p\; \backslash leq\; 1$ such that the agent is indifferent between $L\_2$ and the compound lottery mixing between $L\_1$ and $L\_3$ with probability $p$ and $1-p$, respectively. Independence means that if the agent is indifferent between simple lotteries $L\_1$ and $L\_2$, the agent is also indifferent between $L\_1$ mixed with an arbitrary simple lottery $L\_3$ with probability $p$ and $L\_2$ mixed with $L\_3$ with the same probability !$p$.Ind ependence? is probably the most controversial of the axioms.Daniel Bernoulli has shown how the personal utility varies with the personal degree of risk aversion, itself linked to the initial wealth situation of the person.

Discussion and criticism - The theory of consumer choice has come under criticism from different angles. One is behavioral economics, where different experiments show that consumers have a higher loss aversion than preference for a related gain. Also, estimations for small probabilities and their utility payoffs are difficult for laypersons to estimate (See Matthew Rabin's emlab.berkeley.edu - homepage for some puzzles connected with consumer theory).

See also -

Marginal utility

Ellsberg paradox

microeconomics

behavioral economics

expectation utilities

list of economics topics

game theory

efficient market theory

prospect theory

risk aversion

risk premium

Utility Maximization Problem

utility (patent)

utility model

References and additional reading -

John von NeumannNeumann, John von and Oskar MorgensternMorgenstern, Oskar ''Theory of Games and Economic Behavior''. Princeton, NJ. Princeton University Press. 1944 sec.ed. 1947

John Forbes Nash Jr. (mathematician)Nash Jr., John F. The Bargaining Problem. ''Econometrica'' 18:155 !1950Category:Utilitycs:Užitek de:Nutzenfa:مطلوبیتfr:U tilitéko:효용ja:効用zh:æ• ˆç”¨

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SFEcon is essentially a methodology by which the Neo-classical School of economic thought can be quantified as a general engineering-dynamic model. These models are ‘general’ in the sense that they operate on any international input/output context irrespective of how the economic researcher might wish to segment his vision of the economic continuum. They are ‘dynamic’ insofar as they apprehend economic order as if it were the operational outcome of a highly distributed analog computer whose state variables are the physical quanta of economic goods as they exist over time in the service of the various economic sectors (which include households, governments, etc.) SFEcon’s emulators present a continuous accounting of Sijkt, the physical stock S of Commodity J held by Sector I of Economy K at Time T. These emulators proceed via recognizable business cycles from any chaotic economic state toward the unique general equilibrium implied by the system’s boundary conditions, which are the sectors’ technical and utility tradeoffs. When boundary conditions are held artificially constant, models will settle into decaying orbits around general equilibrium’s standard criteria, viz.: each sector’s value of marginal product for each commodity aligns with that commodity’s marginal cost of production - which condition must occur just as all demands come to be offset by their respective rates of supply and all markets clear. (Global supply and demand are sums, respectively, on the outputs and inputs to the technical and utility tradeoffs defining the economic system’s boundary.) Though SFEcon models will realize complicated quantifications of general equilibrium criteria, they are never aware of the ultimate state toward which they tend; and their operation is indifferent as to the emulation of chaos or stasis. These models are true finite-state machines in that all they ever know is their current state and their rules for computing their next state. Though the models achieve an elegant resolution, they only do so by always operating on the verge of a future that is unknowable in all the senses cited by von Mises. SFEcon is made possible by Kurt Roemer’s solution, in mathematically closed form, to the economist’s classic Polynomial Factoring Problem. Roemer’s demonstration turns on a certain parameterization of the hyperbolic form which always resolves the premises of general economic equilibrium into a polynomial description of economic optimality that can be factored. This enables computation of the sectors’ technical and utility tradeoffs from observations of 1) a matrix of physical exchanges, and 2) the prices at which those exchanges occur. So computed, the boundary of economic activity presents a degree of curvature for every cell in a theoretically limitless input/output structure. SFEcon’s boundary parameters and state variables are defined in the economic commodities’ physical units of measure; and control of this system is guided by endogenous computations of value – not price. Hyperbolic utility parameters are shown to interact with the matrix of exchange to create absolute measures of value for each commodity that are conceptually prior to a model’s awareness of price. These measures are no more variable than the BTU, board-foot, or short ton. Value interacts with separate accountings for the history of monetary exchanges to establish current commodity prices at their proper levels with respect to the underlying system of value implicit in a model’s parameters and current state. In sum, SFEcon presents economics as a true science of value as it might be determined by the free exercise of market capitalism. It offers empirical bases for the evaluation of familiar economic principles, as well as for their formal application to issues such as resource depletion, demographic change, separation of social classes, and global economic integration. Source code, documentation, and free tutoring for SFEcon’s primitive models are available at their site.
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