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/contentment” 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 by the community at large, be it in a city or any given country generally.

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; what in economic terms is called maximum (total) utility. Total utility as the total amount of satisfaction that a person can get from the consumption of all units of a specific product or service.

Economists are, however, more interested in and keep a keen eye on changes in the levels of utility or what is referred to as the marginal utility (of consumption or demand). We will return to its application to the economy. However, another example to shed more light on this concept. Incidentally, this has no formal unit of measurement – though some have coined the term “utils” to 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). The same concept can be applied to the taste (and not the quantity) of the meal and explains why we probably tend to eat something sweet in lieu of the main meal.

The appreciation of the taste of ice cream when you are starving would probably diminish quickly as you concentrate more on filling up your stomach rather than 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, consequently directing expenditure in identified priority areas (products/services). 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, should thus 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

The concept of utility is a lot less ubiquitous as we think and can relate to the unsavoury phenomenon of megalomania and why there is greed. When the level of satisfaction or self-gratification diminishes quickly, one finds that it takes longer for those experiencing lower levels of marginal utility to reach their 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.

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 (whether luck or calculated), will often drive people to take more risk until a level of risk aversion kicks in – hopefully when it is not too late. High-risk equity investors “called whales” alike, are now dipping into the Crypto market to maximize their utility by diverting their funds from property and stock trading into digital currencies like Bitcoin and Ethereum – they are largely accountable for the volatility in the said markets from this self-fulfilling exercise.

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 to ensure that you do not maximise utility on them too quickly and lose interest or worse yet – delve too deep into the dangerous territories of addiction generally and other societal scourges mentioned above.

Economists need to be relevant, more than ever before, and 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.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s