UTILITY

-
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.

Comments

Post a Comment

Popular posts from this blog

THE RICE INDUSTRY IS A PERFECT COMPETITION?

-
Image
THE RICE INDUSTRY IS A PERFECT COMPETITION? Perfect competition exists when there are a very large number of small firms that operating in the identical(homogeneous) product or services and none of who can be affected by the price by increasing output or restricting it because both buyers and sellers are price takers. Furthermore, the companies have perfect knowledge about costs and prices across the market. Everyone is aware of affirm of everyone else's price and has perfect information on the tastes of buyers. In a perfect competition, there are no barriers to enter. One example of an industry in Malaysia that has perfect competition is agriculture, mainly rice. So, there is several company in Malaysia that produce rice such as BERNAS SDN BHD, FAIZA SDN BHD, NINAMAJU SDN  BHD and others Figure 1: Profit maximization using average and marginal revenue and cost curves     What we can see that perfect competition is never likely to exist in reality
Read more

TNB Monopoly in Malaysia

-
Image
Tenaga Nasional Berhad (TNB) is one of the monopoly firm operating in Malaysia consumer market. TNB is the largest electric utility company in Malaysia and largest power company in Southeast Asia.  TNB Headquarter, Bangsar, Kuala Lumpur TNB Manjung, Perak As we know, TNB is the largest electric power provider in Malaysia and it is also known as one of the monopoly firms in Malaysia. EMIS (2013) also mentioned that TNB has the license to operate the company as a monopoly firm for 21 years initially. Basically, a monopoly firm can be defined as the one and only seller or producer that sells goods or services to buyers or consumers. Since TNB is the only electricity provider in Malaysia, TNB has full control over price. Thus, TNB has the power to increase the price without any valid or reasonable reason; and they would not worry that their customers will run away. This is because there is no close substitute for a monopoly firm and the company can practice “T
Read more

INDIFFERENCE CURVES AND BUDGET LINES

-
Image
An indifference curve is a line showing all the combinations of two goods which give a consumer equal utility. In other words, the consumer would be indifferent to these different combinations. Choice of goods with give consumers the same utility APPLES BANANAS 22 17 14 20 10 26 9 41 7 80 Table plotted as indifference curve Diminishing marginal utility The indifference curve is convex because of  diminishing marginal utility . When you have a certain number of bananas – that is all you want to eat in a week. Extra bananas give very little utility, so you would give up a lot of bananas to get something else. Indifference curve map We can also show different indifference curves. All choices on I2 give the same utility. But, it will be a higher net utility than indifference curve I1. I4 gives the highest net utility. Basically, I4 would require higher income than I1. Budget line A budget line shows the combination of goods that can be afforded with your c
Read more