UTILITY THEORY

BRIEF ABOUT UTILITY

What do you mean by 'utility'? In a word utility indicates satisfaction. More precisely, it refers to how consumer rank different goods and services. Often, it is convenient to think of utility as a subjective pleasure or usefulness that a person from consuming a goods or services.

Utility is a function or feeling that can be observed or measured. Rather utility is a scientific construct that economists use to understand how rational consumer make decision. We derive consumer demand function from the assumption that a people make decision that give the greatest satisfaction or utility.

"In the theory of demand, we assume that people maximize their utility, which means that they choose the bundle of consumption goods they most prefer.

So, lets take a example, if basket A has a higher utility than basket B, for Jhon this ranking indicates that Jhon prefers basket B.