What is Utility?

What is Utility?

Dear Jessi and Tim,

I apologize if you guys have been through all this already and think it’s too boringly basic. I tried to include some stuff that I think is interesting, but that your coursework might have skimmed over. Alright, here goes.

Utility is satisfaction. Some would say happiness, but I think satisfaction is a better words for this reason: satisfaction comes from something. Happiness is more of a state-of-being. Objects do not possess utility, and it's slightly misleading to say they "provide" utility. Rather, you might say people derive utility from objects. So when an economist refers to an object’s utility, he isn’t saying the object possesses the utility somehow... it’s like talking about a pet’s owner. The possessive form implies an association, not actual possession.

It Only Gets Worse

There are two interesting things to notice when it comes to utility. The first is called the law of diminishing returns. Now, this might not be accurately called a “law,” but it makes sense. It goes like this: generally speaking, the more quantity you acquire, of any good, the less utility you derive from the marginal product (marginal = at the edge, so marginal product is the very last one you bought). So your first shirt may give you “20 utility points,” but the second only gives you “18 utility points.”

This is simple to explain. People always choose the option that they think will give them the greatest amount of utility. So if you choose a shirt, you get 20 utility points. But X was the largest amount of utility you could possibly have chosen at that moment, so the next choice has to provide just a little less. Maybe a book you wanted, that gives you 19 utility points. But now that your first and second best choices are done, you go to the third best choice: another shirt, which provides only 18 utility points since you already have one, and the need for a isn’t as pressing.

That’s just a general rule; there can be exceptions. It’s a dumb thing to argue about, despite the fact that some people will.

Are We Utility-Maximizers?

Since utility is purely subjective, it would seem to follow that we're all utility-maximizers. After all, it's impossible to do make a choice without "wanting" to make it. You might not like doing homework, but you do it because you want to do homework MORE than you want to fail the test. You might not like to take your vitamins, but you want your vitamins more than you want to be unhealthy.

Still, there is a difference between utility in the here-and-now, and utility in the long run. If I say, "want to get up at 5 am and jog next week?" you might say yes. If I actually woke you up at 5 am, you would probably say something different. The things people choose in an immediate setting are not what they choose in a long-run setting when they plan future activities.

This, by the way, is what enables us to make decisions about what is best and worst for certain members of society. They may be maximizing short-run utility, but for a drug addict that short-run might be no longer than however long it takes to get the needle in his arm.

So even though people only do things that give them utility, in the long-run, they often live lives that are far-less-than-optimal, even when they know exactly what behaviors would improve their general well-being. Their heads are in the long-run, but their behavior is in the immediate.

Can Utility be Measured?

Are “utility points” real? Can we measure or quantify utility? Can we decide which behavior or product provides more utility?

Erm... depends. If you’re referring to individuals the answers are no: we simply don’t have the technology to peer into the brain and figure out what utility is or how to measure it, by looking at brain waves and neurotransmitters.

If you’re asking about groups, we do. This is just because of a quick in statistics. Even if we cannot measure individual experiences of utility, we know that it has to average out in a large group of people.

To illustrate the difference:

if you are willing to pay ten dollars for a pair of jeans, you illustrate that you want the jeans, but not how much you want them. Maybe there’s another kid who wants to only pay five dollars for the jeans, but his brain is still wired such that he would enjoy them more. Maybe he’s too poor to pay any more.

But in a large group, let’s say a group of 1,000 people are willing to pay ten dollars for the pair. Another group of 1,000 people will only pay five dollars. All those random variations between individuals get lost in an average, cancelled out by deviations in the opposite direction. SO we can say the group of people who pay ten dollars will truly want the jeans more.

Insert clever, well-written ending here.