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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 .
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.
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 antibiotics, where having too few pills would leave bacteria with greater resistance, but a full supply could affect a cure. [18]
In economics, willingness to accept (WTA) is the minimum monetary amount that а person is willing to accept to sell a good or service, or to bear a negative externality, such as pollution. [1] This is in contrast to willingness to pay ( WTP ), which is the maximum amount of money a consumer (a buyer ) is willing to sacrifice to purchase a good ...
Examples of alternatives to utility maximisation due to bounded rationality are; satisficing, elimination by aspects and the mental accounting heuristic. The satisficing heuristic is when a consumer defines an aspiration level and looks until they find an option that satisfies this, they will deem this option good enough and stop looking.
The term E-utility for "experience utility" has been coined [2] to refer to the types of "hedonistic" utility like that of Bentham's greatest happiness principle. Since morality affects decisions, a VNM-rational agent's morals will affect the definition of its own utility function (see above).
In economics, a random utility model (RUM), [1] [2] also called stochastic utility model, [3] is a mathematical description of the preferences of a person, whose choices are not deterministic, but depend on a random state variable.