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In economics, utility is a measure of a certain person's satisfaction from a certain state of the world. Over time, the term has been used with at least two meanings. In a normative context, utility refers to a goal or objective that we wish to maximize, i.e., an objective function.
In economics, a cardinal utility expresses not only which of two outcomes is preferred, but also the intensity of preferences, i.e. how much better or worse one outcome is compared to another. [1] In consumer choice theory, economists originally attempted to replace cardinal utility with the apparently weaker concept of ordinal utility.
The price elasticity of demand is a measure of the sensitivity of the quantity variable, Q, to changes in the price variable, P. It shows the percent by which the quantity demanded will change as a result of a given percentage change in the price. Thus, a demand elasticity of -2 says that the quantity demanded will fall 2% if the price rises 1%.
Income elasticity of demand is an economic measurement tool developed to measure the sensitivity of a goods quantity demanded when there is a change in the real income of a consumer. To calculate the income elasticity of demand, the percentage change in quantity demanded is divided by the percentage change in the consumers income.
A single-attribute utility function maps the amount of money a person has (or gains), to a number representing the subjective satisfaction he derives from it. The motivation to define a utility function comes from the St. Petersburg paradox: the observation that people are not willing to pay much for a lottery, even if its expected monetary gain is infinite.
Bang for buck is a concept in utility maximization which refers to the consumer's desire to get the best value for their money. If Walras's law has been satisfied, the optimal solution of the consumer lies at the point where the budget line and optimal indifference curve intersect, this is called the tangency condition. [ 3 ]
Dupuit went on to define "relative utility" as the area under the demand/marginal utility curve above the price and used it as a measure of the welfare effects of different prices – concluding that public welfare is maximized when the price (or bridge toll) is zero. This was later known as Marshall's "consumer surplus".
In economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to ask how much better it is or how good it is.