Utility and Preferences

Individuals consume goods and services because they derive pleasure or satisfaction from doing so. Economists use the term utility to describe the pleasure or satisfaction that a consumer obtains from his or her consumption of goods and services. Utility is a subjective measure of pleasure or satisfaction that varies from individual to individual according to each individual's preferences. For example, if an individual's choices for a Saturday evening are to watch television, go out to dinner, or go to a movie, then, depending on that individual's preferences, he or she will attribute different levels of utility to each of these three activities. Of course, it is not possible to measure utility, nor is it possible to claim that one individual's utility is higher than another's. Utility is just a unitless measure that economists have found useful in their explanation of consumer choice.

Total and marginal utility. The utility that an individual receives from consuming a certain amount of a particular good or service is referred to as that individual's total utility. The marginal utility of a good or service is the addition to total utility that an individual receives from consuming one more unit of that good or service.

Law of diminishing marginal utility. The law of diminishing marginal utility states that the marginal utility that one receives from consuming successive units of the same good or service will eventually decrease as the number of units consumed increases. As an example of the law of diminishing marginal utility, consider the utility that one obtains from drinking successive glasses of lemonade on a hot day. Suppose the first glass just begins to quench one's thirst. After two glasses, however, the thirst has all but disappeared. A third glass of lemonade might also provide some utility, but not as much as the second glass. A fourth glass cannot be finished. In this example, the marginal utility—the addition to total utility that one obtains from drinking lemonade on a hot day—is increasing for the first two glasses but is decreasing beginning with the third glass and would continue to decrease if one were to consume further glasses.