Utility function

economic-dictionary

The utility function is a mathematical equation that represents the "satisfaction" or "utility" that a consumer obtains when he enjoys a certain amount of goods or services.

The concept of utility is something subjective that cannot be measured. That is, due to different factors that depend on each person, it is difficult to quantify this concept. However, it is possible to simulate and get an idea thanks to the utility functions.

The utility function assigns a numerical value to each quantity of the good that you choose to consume. Thus, the higher that value, the better the buyer's situation.

Graphical representation of the utility function

In the following graph we see an example of the utility function:

Utility function features

The most outstanding characteristics of the utility function, which we can see in this graph, are the following:

  • The utility increases but in a decreasing way, that is, it has a maximum value and from that point the utility will decrease.
  • If consumption of the good increases, total satisfaction grows. However, at a point, the variations in utility are smaller and smaller.

Economists use the term utility to calculate the satisfaction that people obtain in activities such as work, consumption or investment. These activities generate positive utility and those that do not satisfy produce negative utility, since tastes may be different for each person.

In addition, there is a relationship between utility and wealth that we call the investor's financial utility function. This will always seek more wealth than less wealth, and the problem in this case is to know to what extent the investment made increases the investor's profit. In other words, the more wealth you get, the more positive profit you get and the more motivation you have to go in search of more.

Production function

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