Utility maximization problemUtility maximization was first developed by utilitarian philosophers Jeremy Bentham and John Stuart Mill. In microeconomics, the utility maximization problem is the problem consumers face: "How should I spend my money in order to maximize my utility?" It is a type of optimal decision problem. It consists of choosing how much of each available good or service to consume, taking into account a constraint on total spending (income), the prices of the goods and their preferences.
Ordinal utilityIn economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to ask how much better it is or how good it is. All of the theory of consumer decision-making under conditions of certainty can be, and typically is, expressed in terms of ordinal utility. For example, suppose George tells us that "I prefer A to B and B to C".
Revealed preferenceRevealed preference theory, pioneered by economist Paul Anthony Samuelson in 1938, is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies on consumer behavior. Revealed preference models assume that the preferences of consumers can be revealed by their purchasing habits. Revealed preference theory arose because existing theories of consumer demand were based on a diminishing marginal rate of substitution (MRS).
Marginal rate of substitutionIn economics, the marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. At equilibrium consumption levels (assuming no externalities), marginal rates of substitution are identical. The marginal rate of substitution is one of the three factors from marginal productivity, the others being marginal rates of transformation and marginal productivity of a factor.
Convex preferencesIn economics, convex preferences are an individual's ordering of various outcomes, typically with regard to the amounts of various goods consumed, with the property that, roughly speaking, "averages are better than the extremes". The concept roughly corresponds to the concept of diminishing marginal utility without requiring utility functions. Comparable to the greater-than-or-equal-to ordering relation for real numbers, the notation below can be translated as: 'is at least as good as' (in preference satisfaction).
Indifference curveIn economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer.
Consumer choiceThe theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption (as measured by their preferences subject to limitations on their expenditures), by maximizing utility subject to a consumer budget constraint. Factors influencing consumers' evaluation of the utility of goods include: income level, cultural factors, product information and physio-psychological factors.
Cardinal utilityIn economics, a cardinal utility function or scale is a utility index that preserves preference orderings uniquely up to positive affine transformations. Two utility indices are related by an affine transformation if for the value of one index u, occurring at any quantity of the goods bundle being evaluated, the corresponding value of the other index v satisfies a relationship of the form for fixed constants a and b. Thus the utility functions themselves are related by The two indices differ only with respect to scale and origin.
Marginal utilityIn economics, utility refers to the satisfaction or benefit that consumers derive from consuming a product or service. Marginal utility, on the other hand, describes the change in pleasure or satisfaction resulting from an increase or decrease in consumption of one unit of a good or service. Marginal utility can be positive, negative, or zero. For example, when eating pizza, the second piece brings more satisfaction than the first, indicating positive marginal utility.
UtilityAs a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill. The term has been adapted and reapplied within neoclassical economics, which dominates modern economic theory, as a utility function that represents a consumer's ordinal preferences over a choice set, but is not necessarily comparable across consumers or possessing a cardinal interpretation.
