Econ501aL3 - Preferences and Utility Functions Underlying...

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Preferences and Utility Functions Underlying the demand function is consumers’ choice of goods and services that are most preferred. Early economists thought that utility is a physical prop- erty that can be measured and compared across con- sumers. “utils” for utility, like degrees of temperature. This is an exteme form of cardinal utility , sometimes used to justify the existence of a leisure class. (The people good at producing should work, and the people good at creating utility should consume.) Around 1900, the Marginalists believed that utility can- not be meaningfully compared across people, but that an individual could assign meaningful numbers to the utility of consuming the f rst orange, the second orange, and so on. diminishing marginal utility
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Ordinal Utility Even for an individual, the happiness derived from con- suming a particular good (cookies) depends on what other goods are being consumed (milk). Utility should be based on combinations of consumption goods, called con- sumption bundles . for simplicity, we usually assume two goods, x and y Under ordinal utility , we can only give a rank ordering of di f erent consumption bundles (which bundle is pre- ferred). In other words, consider a utility function that assigns a number to every possible consumption bundle. A bundle with a higher utility number is preferred to a bundle with a lower number. Under ordinal utility, the magnitude of the utility numbers has no meaning, only the ranking.
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This note was uploaded on 07/17/2008 for the course ECON 501.02 taught by Professor Yang during the Spring '08 term at Ohio State.

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Econ501aL3 - Preferences and Utility Functions Underlying...

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