How To Better Understand Utility Functioning
The word utility is normally appointed as usefulness. It is the contentment we get from using, owning, or accomplishing something.
However, the term is largely and frequently used in economics as the quality of an item or good that satisfies human need and demand. As this item possesses utility (usefulness) that gratifies directly or indirectly, it also measures preferences over established goods and services therefore the importance in economic sciences.
All About Commodity
The economic utility is, as a matter of fact, a very relative concept where a “want - satisfy” scope of the commodity depends on types of needs and who needs them. Economists are interested in utility because it offers a mathematical framework whereon to portray people's probability of making certain choices. Also, not all utilities have the same worth for different people. For example, a fishing rod has a greater value for a fisherman, bread has a utility for a person stricken with hunger, medicine for the ill one.
Based on utility maximization the customers seek to get the highest satisfaction from their economic decisions. They will always have this in mind when deciding how to spend a certain or fixed amount. The customers will also try to get a better deal by comparing different sets of products and services while measuring utility with money. The price that the person is prepared to pay is the reflection of utility and the paying capacity of the customer determines the utility of goods or services.
If product sales rise or fall, it is important to understand the cause. Detection and calculating this value, the benefit, and the satisfaction that consumers obtain is the area of mathematics in the economy called utility functioning.
Understanding Utility Functions
As a rule, scheming of this fulfillment is very abstract as its subject is very subjective and difficult to define.
The principle is to set a preference function (a certain number of fixed customers' preferences) and challenge it with a set of other options and a budget constraint (the only thing that limits our consumption is our budget).
The preference function or utility function is indicated with U(x1,x2,x3…) where U is the function of the quantities or preferences. These sets of options can be put as A, or B, or C, etc.
The customer will prefer A than B or C because it acquires greater utility from it, and we will be able to conclude which relationship between utility, preferences, and other choices can be used to determine utility functions of decision-making.
Importantly, utility functions do not accredit a numerical value to customers’ preferences. They simply indicate the order and significance of them, what the customer likes more, and how much, which can be of great benefit to the marketing sector.
Types And Versions
There are four types of economic utility:
Form Utility
How much a commodity or service actually meets the customer's wishes. Lower prices, more appliances, a wider selection of commodities, are the efforts used to increase and maximize the perceived value of the products
Time Utility
Considers the most convenient and preferable time for customers to buy the product. Working hours during weekends, 24-hour availability, or online customer service are these actions toward aptness.
Place Utility
Includes making goods or services physically available or accessible to potential customers. A Retail store's location, how easy a company's website or services are to find on the internet, or setting the product available in many locations and stores, are increasing the advantage.
Possession Utility
Regards to the amount of usefulness or perceived value from owning the product. Increasing the ease of ownership increases the perceived value of the product.
The economists also recognize two more types of utility:
Service/task utility - these utilities have the capacity to meet human needs.
Natural Utility - things free from nature have this kind of utility, like air and water.
According to the satisfaction acquired by its consumption, a utility can be:
Total
Marginal
Initial
The differences between these utilities are that the initial utility is representing the first, introductory unit of the commodity while the total one is, as the name says, the total fulfillment received from consuming the total quantity of a commodity or service. The marginal is the one receiving the additional unit from the same source. The total utility tends to be the same as the initial one, but with the marginal one, it tends to decline.
The total utility for a certain product is quite easy to realize and conclude, maybe once as initially, but the constant impedance of marginal utility is a constant challenge for economists and marketing experts because marginal utility always declines for each consecutive quantity of consumption. The same is for any product, whether it is bread or money.
Knowing that utility can be subjective, immeasurable, relative, and variable, the struggle to determine the course of desire and usefulness is a job of constant updating and developing, but still well worth and important. If we add morality and pleasure, we get an abstract science that tries to predict our truest wishes, but is it in our genuine interest?
