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Utility
 

 

The satisfaction, pleasure or fulfilment of needs derived from consuming some quantity of a good. It is essentially a psychological concept whihc is incapable of direct measurement in absolute units. The concept of utility lay at the heart of the classical theory of demand, ine the form of the law of diminishing marginal utility, until the 1930s, when J. R. Hicks and R.G.D. Allen rediscovered and extended the work of E. Slutsky and V.F.D. Pareto on indifference analysis. The object was that if utility is essentialy unmeasurable, it is invalid to construct a theory which proceeds as if it could be measured. Demand theory was therefore recast in terms of ordinal utility, i.e. the consumer was assumed simply to be able to rank quantities of goods on the basis of preference or indifference. Then, to say that some combinations of goods has a 'greater utility' than some other combination simply means that the consumer prefers the first combination to the second. Though most of the results of demand therory are unchanged, this interpretation of utility as a preference, rather than as some 'crude hedonistic calculus', is held to have put the theory on a much sounder footing.

Reference: The Penguin Dictionary of Economics, 3rd edt.