In economic terminology, the term “utility” has not much to do with multifunctionality nor completing specific useful tasks.

It does in context, relate to the level of satisfaction or “completeness” one derives from the consumption of a product or service. For example, there is only so much pizza one can eat before feeling ill from satiety.

On a broader and more macroeconomics spectrum, our utility levels will also help determine how resources are allocated and consumed.

Definition

The concept, a brainchild of Daniel Bernoulli, has so many relevant connotations. As humans, we individually have a maximum biological boundary which when reached, signals absolute satisfaction. This in economic terms is called maximum (total) utility.

Total utility as the complete satisfaction that you can get from consuming all units of a specific item.

Economists are more interested in the changes in levels of utility or what is referred to as the marginal utility.

We will return to its application to the economy.

Applying utility

Incidentally, utility has no formal unit of measurement – though some have coined the term “utils”. These so-called utils equate a number to utility levels in a controlled sample experiment.

Understandably it can be quite a feat to quantify utility as it is based on human behavioural preferences. The closest we got to quantifying such was via the marketing concept of the consumer black box.

N26_banner-160x600-ENAs an illustration, the concept can be applied to something as basic as eating a delicious meal.

Depending on how hungry you were, you would derive the highest utility from the first few bites of your meal.

As you progressed and depending on your appetite, each additional fork, spoon, handful more would provide fewer levels of satisfaction. As you reach your stomachs capacity (inch towards satiety) your utility diminishes.

This can be applied to the taste of the meal. It specifically explains why we tend to eat something sweet after a main (savoury) meal.

The appreciation of ice cream when you are starving would diminish quickly as you concentrate on filling up your stomach. This as opposed to enjoying the taste.

When applied properly to the running of an economy, governments and policymakers can determine which goods and services yield the most maximum utility.

This helps them to consequently direct expenditure to identified priority areas (products/services).

It is a long term concept

Education, for instance, may not provide immediate utility (gratification) for scholars and pupils. However, when appropriately harnessed, it could yield higher levels of satisfaction as individuals enter the job market with better remuneration packages.

Tweaking education curricula, taking into consideration levels of utility to whip up interest for the good of the individual. This should, therefore, be a prime focus for legislators.

Inputs such as maximum times that students can concentrate and the length of study for a degree, diploma or course should be offered without compromising the substance.

Without a doubt, there would be considerations, at a micro-level to assist in enhancing both marginal and total utility in the education sector.

Read more about fiscal policy and budgets here

More life-related uses

The concept of utility is a lot less ubiquitous as we think and relates to the unsavoury phenomenon of megalomania and why we have greed.

When the level of satisfaction or self-gratification diminishes quickly, you find that it takes longer for those experiencing lower levels of marginal utility to reach a plateau of pleasure.

Drug addiction, sexual appetites, and fetishes would then kick-in in such cases where people upgrade the “product or service” that they have already maximized their utility. At that stage, another level of fulfilment would be sought.

Utility applied to finances

120x600It also explains why people lose a lot of money gambling or investing in stocks. The satisfaction of gaining more for a little outlay based on your decisions, will often drive you to take more risk until a level of risk aversion kicks in.

High-risk equity investors “called whales”  are now delving into the Crypto market to maximize their utility. They are diverting their funds from property and stock trading into digital currencies like Bitcoin and Ethereum.

The saying too much of a good thing is inevitably bad for you applies and can be countered by diversifying the things that deliver pleasure or satisfaction.

This is to ensure that you do not maximise utility on them too quickly and lose interest.  Worse case, delve too deep into the dangerous territories of addiction.

Economists need to be relevant, more than ever before. They also need to formulate a means to measure and quantify utility or provide “utils” for at least, the most common goods and services.

With such a strategy, policy-making, product pricing and the efficient allocation of resources would be more effortless.
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