Tutorial Home Utility, Substitution and Demand


2: Utility

In general, if my current choice is A, I might change to alternative B if:

Spelt out at length, this becomes a mess. We would like to express all of this in one go, and this is where we bring in the other microeconomic topic: utility.

Utility is just a numerical comparative measure of the subjective desirability of something. By "comparative" I mean that a utility on its own has no meaning: the numbers are only useful as a basis for comparing different options. Saying that there are only three options, whose utilities are 1, 2 and 3, is in effect the same as saying that their utilities are 101, 102 and 103, or for that matter 0.1, 0.2 and 0.3.

The decision principle that goes with this is the Maximisation of Subjective Expected Utility:

Now let’s apply this to a specific choice.

INDEX | 1 2 3 4 5 6 7 8 9 | NEXT