Utility

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In economics, utility is a measure of relative satisfaction. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility. Utility is often modeled to be affected by consumption of various goods and services, possession of wealth and spending of leisure time.

The doctrine of utilitarianism saw the maximization of utility as a moral criterion for the organization of society. According to utilitarians, such as Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1876), society should aim to maximize the total utility of individuals, aiming for "the greatest happiness for the greatest number of people". Another theory forwarded by John Rawls (1921–2002) would have society maximize the utility of the individual initially receiving the minimum amount of utility.

Utility is usually applied by economists in such constructs as the indifference curve, which plot the combination of commodities that an individual or a society would accept to maintain a given level of satisfaction. Individual utility and social utility can be construed as the dependent variable of a utility function (such as an indifference curve map) and a social welfare function respectively. When coupled with production or commodity constraints, under some assumptions, these functions can represent Pareto efficiency, such as illustrated by Edgeworth boxes in contract curves. Such efficiency is a central concept in welfare economics.

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Quantifying utility

It was recognized that utility could not be measured or observed directly, so instead economists devised a way to measure actual behavior and assume that, in a perfectly competitive equilibrium, this behavior reveals the underlying relative utilities. These 'revealed preferences', as they were named by Paul Samuelson, were revealed in price:

Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly, by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire. (Marshall 1920:78)[1]

Cardinal and ordinal utility

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