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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.
For example, beyond some point, further doses of antibiotics would kill no pathogens at all and might even become harmful to the body. Diminishing marginal utility is traditionally a microeconomic concept and often holds for an individual, although the marginal utility of a good or service might be increasing as well. For example, dosages of ...
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.
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.
Standard utility functions represent ordinal preferences. The expected utility hypothesis imposes limitations on the utility function and makes utility cardinal (though still not comparable across individuals). Although the expected utility hypothesis is standard in economic modelling, it has been found to be violated in psychological experiments.
In neoclassical economics, this utility is ultimately subjectively determined by the buyer of a good, and not objectively by the intrinsic characteristics of the good. Thus, neoclassical economists often talk about the marginal utility of a product, i.e., how its utility fluctuates according to consumption patterns. This kind of utility is a ...
In practice, a consumer may not always pick an optimal bundle. For example, it may require too much thought or too much time. Bounded rationality is a theory that explains this behaviour. Examples of alternatives to utility maximisation due to bounded rationality are; satisficing, elimination by aspects and the mental accounting heuristic.
Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water.