Utility
In other words, 'utility is a measure of the relative satisfaction or desiredness from consumption of goods.' It is relative because something that makes someone happy does not necesarily make another person happy (or equally happy). For instance, little children who can have chocolate only once in a year are more likely to enjoy eating the chocolate more than an adult who has packs of chocolate stored in his/her kitchen so this person can access the chocolate easily whenever s/he wants. Therefore, it is perfectly okay to say happiness is relative. Also, because utility is something that can be measured, it is possible to talk about increasing or decreasing utility. Utility is measured by the unit calles util.
The goal of the economists and politicians is to increase the amount of utility the society gains as a whole. Jeremy Bentham (1748-1832) and John Stuart Mill ( 1806-1876) are the utilitarians that came up with the idea of 'the greatest happiness for the greatest number.'
In order to increase the total amount of happiness the society gets, the economists try to solve the problem of scarcity; that is people want to have several things but the resources are limited. As a result, not everyone can get what they want so the sources should be used efficiently to get the best outcome. 'Utility explains how individuals and economies aim to gain optimal satisfaction in dealing with scarcity.' Scarcity and its association with utility is best explained by the paradox of water and diamonds. Water is essential for human beings, without water people will simply die. On the other hand, diamonds are not important in order to survive. However, water is much cheaper than diamonds. Why people are willing to pay more money for the diamond? The answer is scarcity. Diamonds are less abundant than water so the cost of production of diamonds is relatively high. Even the diamonds are not as important as water, they are more expensive. The law of demand and supply explains this paradox: the supply is restricted and it is the demand that increases/decreases the price. As Richard Whately says 'It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.'
Although most of the people think more consumption means more utility, that is not true. For instance, the happiness someone gets from drinking a glass of water decreases each time. The utility is highest after the first glass. It decreases after the second glass and it decreases even more after the third glass. Briefly, with each marginal (additional) glass of water, the satisfaction decreases. After a while, consuming water won't be a satisfaction but something unpleasent. This concept is called the law of diminishing marginal utility.
Glasses of water Marginal Water Utility Total Water Utility
0 0 0
1 80 80
2 50 130
3 10 140
4 2 142
As it is seen on the table above, total utility increases with each additional glass of water but it increases less and less each time. That's why the curve that shows the relationship between utility and consumption is directly related, it has a positive slope but the slope gets smaller and smaller, approaching to a limit.
The demand curve, which explains the consumer demand theory, has a negative slope. According to the demand theory, which shows the relationship between consumer behavior and satisfaction (therefore related with utility) and prices, people are rational enough to spend their money on different items rather than only on one product because their goal is to increase their utility. For instance, instead of getting three hamburger with fries, which is eqaul to total utility of 100; it is more rational to get two hamburgers with fries with a total utility of 80 and a glass of soda with total utility of 50. The second option gives total utility of 130. Therefore, total utility of getting two hamburgers and soda is greater than the total amount of utility gained from buying three hamburgers at the same total price. As a result, buying different products is more rational than buying more of one product. Secondly, money is not equal to happiness because as it is seen in the example above, the same amount of money spent gives different amount of utility.
According to the researches, money may increase happiness but this does not mean that money increases happiness. That is getting richer does not mean being more satisfied. Although people who have jobs are proven to be happier than the ones without jobs or low inflation increases happiness or an increase in income pleases almost everyone, the economists insist that money is not equivalent to utility. They believe that individuals have the potential to increase their own happiness. For instance, in most of the developed countries, even the sharp increases in incomes were not capable of increasing utility. The national surveys on happiness did not change although the incomes were higher and usually higher income leads to more consumption. For that reason, it is argued that in most cases consumption and utility are not the same thing. In other words, happiness cannot be measured by consumption.
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