Can You Explain Choice And Utility Theory?


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Tariq Habib Profile
Tariq Habib answered
In explaining consumer behaviour, economics relies on the fundamental premise that people tend to choose those goods and services they value most highly. To describe the way consumers choose among different consumption possibilities, economists a century ago developed the notion of utility. From the notion of utility, they were able to derive the demand curve and explain its properties.
What do we mean by utility? In a word utility denotes satisfaction. More precisely, it refers to how consumers rank different goods and services. If basket A has higher utility than basket B for Smithy, this ranking indicates that Smith prefers A to B. Often, it is convenient to think of utility as the subjective pleasure or usefulness that a person derives from consuming a good or services. But you should definitely resist the idea that utility is a psychological function or feeling that can be observed or measured. Rather, utility is a scientific construct that economist use to understand how rational consumer divide their limited resources among the commodities that provide them with satisfaction. In the theory of demand we say that people maximize their utility, which means that they choose the bundle of consumption goods that they most prefer.

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