UTILITY

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UTILITY MAXIMIZATION
The process or goal of obtaining the highest level of utility from the consumption of goods or services. The goal of maximizing utility is a key assumption underlying consumer behavior studied in consumer demand theory. Consumers are assumed to make choices, especially concerning the purchase og goods, such that they obtain highest possible level of satisfaction. Utility maximization can be achieved at the peak of the total utility curve.

         Utility maximization is the guiding notion underlying consumer choices analyzed with consumer demand theory and utility analysis. It makes sense to think that people are generally motivated to do what is best for them, to purchase the most satisfying goods, to make the decisions that do more good than harm, to improve their overall standards and well-being that is, to maximize their utility.

Working through the logical consequences of this assumption, when combined with other principles of consumer behavior especially the law of diminishing marginal utility, makes it possible to gain insight into such things market demand and the law of demand.

The Scarcity Connection

The utility maximization goal is based on the seemingly obvious presumption that people prefer more to less. This presumption is tied to the unlimited wants and needs aspect of scarcity. In other words, because people have unlimited wants and needs, satisfying those wants and needs is a desirable thing to do. Someone like Duncan Thurly would rather have a fully belly than an empty one. He would rather live in a cozy, climate-controlled house than in a cardboard box a bridge.

Of course, if wants and needs are unlimited, can anyone actually maximize utility? That is , can Duncan ever achieve the absolute pinnacle of satisfaction ? Can he actually maximize utility. In terms of the scarcity problem, probably not. He might be able to boost utility a little higher by satisfying another unfulfilled want or need. But he is unlikely to maximize utility totally and completely. This is one reason why it is reasonable to think of utility maximization as a process of seeking what is ultimately unreachable.

However, in the analysis of consumer demand theory, utility maximizationhas a more pragmatic interpretation obtaining the highest possible satisfaction from consuming a given good or undertaking a specific activity. While Duncan might not be able to maximization his OVERALL utility, he can maximize the utility obtained from eating Hot Momma Fudge Bananarama Ice Cream Sundaes. It is this pragmatic interpretation of utility maximization that pervades the study of economics.

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