Introduction to utility maximization

Introduction

Utility maximization is a concept in economics which is used in purchasing decision, when a consumer tries to derive the greatest possible value by spending the least amount of money. The consumer's main aim is to maximize the total value obtained from the amount of money which he or she has spent. Consumer behavior uses law of diminishing marginal utility to describe the way consumers allot their incomes.

Utility

Utility refers to the consumer's ability to satisfy their needs. It is the total satisfaction gained by consumption of a product or service. It is difficult measuring the utility of a consumer. So, when it comes to maximization of utility, economists assume that each consumer can measure their utility and arrange their consumption in such a manner so as to make sure that they utility they gain remain as much as possible. Total utility is the number of units of utility which a consumer acquires through the consumption of a specific amount of product or service over a specific time period. The higher the total utility the person gained, the greater will be the level of satisfaction.

Sign matters

Positive utility numbers meaning the numbers which are greater than zero signify that consuming a specific product or service makes the consumer satisfy. In contrast, negative utility numbers i.e. numbers which are less than zero signify that consuming a specific product or service makes the consumer less satisfied. The greater the utility number, the greater will be the satisfaction which a consumer will derive by consuming a product or service.

Ordinal but not cardinal properties

One can compare utility numbers, but it is not necessary that he or she will be able to make calculations using them. For example, if having the utility of 4 is better than having the utility of 2, it is not necessary that having a utility of 4 is twice better than having the utility of 2. Likewise, it is not essential that having a utility of 3 and utility of 4 would add to the utility of 7.

Application

The main aim of maximizing utility is a major assumption fundamental to consumer behavior while studying consumer demand theory. Consumers are supposed to make choices related to the buying of goods from which they can get the highest attainable level of satisfaction. Utility maximization may be achieved at the peak of total utility curve. The consumer's decision regarding what he will consume centers around those products and services which are within a reasonable range, by consuming which he or she can gain the most satisfaction.

Conclusion

This concept has used been used to create the basis of numerous economic as well as psychological behavioral models. The utility derived from purchases has a great impact on the economic well being a business as well as households. Companies also engage in utility maximization when it comes to purchasing of raw materials by entering into contracts which enable them to acquire discounts for buying a specific amount during the contract period to save money.

This article has been compiled by Evelyn, who is a writer on various academic topics.