While somebody may prefer apples to oranges this week, next week oranges may be what is craved. As a result of these and other factors, some have questioned the usefulness of utility in practice. Utility theory has been quite useful in understanding the economic action of individuals, households, and firms—but only in broad strokes. In reality, people may eat a third hamburger for reasons that elude the rational actor assumption of standard economic models.
The notion of rationality is therefore central to any understanding of microeconomics. It is important to emphasize how rationality relates to a person’s individual preferences. For example one person may prioritize flavor while another person may value making healthy choices more. As a result the first person may choose a sugary cereal while the second may choose granola.
How to Maximize Utility: A Rule for Utility Maximization
In ordinal utility terms, a person might eat the first slice of pizza, share the second slice with their roommate, save the third slice for breakfast, and use the fourth slice as a doorstop. Economic utility can be estimated by observing a consumer’s choice between similar products. However, measuring utility becomes challenging as more variables or differences are present between the choices. A cosmetics company might conduct focus groups and testing to identify holes in the market related to different skin types and skin tones.
Form utility is created by the design of the product or service itself. The more precisely a good or service is targeted towards customer needs and desires, the higher its perceived types of utility in economics added value (i.e., form utility) will be. In other words, form utility is obtained by transforming customer needs into products or services. To do this, companies analyze their target markets and survey potential customers to find out what they need. This information can then be used to align product features with actual customer needs.
Advantages and Disadvantages of Utility Function
Form utility refers to how much value a consumer receives from a product or service in a way that they need.
If we could measure utility, total utility would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period.
In drawing his total utility curve, we are imagining that he can measure his total utility.
Among others, this includes processes such as logistics and delivery as well as storage.
This information can then be used to align product features with actual customer needs.
This utility is created by transporting goods from one place to another. Thus, in marketing goods from the factory to the market place, place utility is created. Similarly, when food-grains are shifted from farms to the city market by the grain merchants, place utility is created. A consumer who is fond of apples may find a high utility in apples in comparison to the consumer who has no liking for apples. Similarly a strictly vegetarian person has no utility for mutton or chicken.
Generally speaking, the more “useful” a product is to an individual, the higher its possession utility will be. The reasoning behind this is that a simpler acquisition process usually leads to a higher perceived value of a good or service. To give an example of form utility, think of a car manufacturing company.
How to Calculate Marginal Utility
This concept suggests a uniform steady decline of marginal utility, but that may not always be the case. There can be situations in which one might gain more utility from consuming a later unit of a good than from earlier consumption. If you are going on a date, for example, getting one ticket to a concert will have some utility but the second arguably has more because it enhances the value of the first. The concept of diminishing marginal utility is easy to understand since there are numerous examples of it in everyday life. Imagine it is a hot summer day and you are hungry, so you get some ice cream. But with each spoonful, your hunger decreases and you become cooler.
Cardinal and Ordinal Utility
If its cars are sold exclusively within the US, buying a Super Car is not very attractive for Europeans. However, if the company decides to open dealerships across Europe and sell Super Cars overseas, the availability (i.e., place utility) of its cars for European customers increases. The company continues by stating that “If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue”.
