Utility function
Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
A utility function, written U(x₁, x₂), is a formula that gives a number to each bundle of goods so that a preferred bundle always gets a higher number. It is another way of showing a consumer's preferences, in place of drawing an indifference map. In ordinal analysis only the ranking of the numbers matters, not their size. So "20 versus 10" does not mean "twice as happy".
Example
Suppose U(x₁, x₂) = x₁ + x₂ for ₹5 notes (x₁) and ₹5 coins (x₂). The bundle (3, 6) gets 9 and (4, 5) also gets 9, so the consumer is indifferent between them. The bundle (5, 5) gets 10, so it is preferred.
Don't confuse with
- Total utility (cardinal): in cardinal analysis the numbers are treated as real amounts of satisfaction, so MU = 12 or 6 means something by itself. In a utility function used ordinally, the numbers only rank bundles.
Related concepts
- Ordinal utility analysis
- Indifference curve
- Marginal rate of substitution
- Law of diminishing marginal rate of substitution
- Convexity of indifference curve
- Perfect substitutes
- Monotonic preferences
- Indifference map
- Properties of indifference curves
- Revealed preference