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Introduction to utility | APⓇ Microeconomics | Khan Academy - YouTube
Channel: Khan Academy
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we are now going to introduce ourselves
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to the idea of utility in economics now
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in everyday language if someone says
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what's the utility of that they're
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usually saying what's the usefulness of
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doing that and utility in economics
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takes that view of utility and extends
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that a little bit you could view utility
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and economics as a measure of usefulness
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usefulness
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worth
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value
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some economist will even say it's a
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measure of happiness because things that
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might not have a practical use can still
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have utility to them in economics
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because they're giving you some
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satisfaction or some happiness so i'll
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even write that over here
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and as we'll see it
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is something that economists try to
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measure or try to quantify and they do
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it with just utility units so let's see
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a tangible example of that
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so let's say you wanted to think about
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your utility from scoops of ice cream so
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if we say let's make a call let's make a
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table here so number of scoops
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that'll be in my left column and on my
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right column let's think about total
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total
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utility
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and i will do it in utils you could view
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that as your unit of utility
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and let me put my columns in here
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so
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there we go
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and so let's say if i have zero scoops
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of ice cream well you might guess what
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my utility is going to be it is going to
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be zero
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now what if i have one scoop of ice
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cream
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well let's just say that that is 80
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utility units and i know what you're
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thinking so where did you come up with
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80 utility units and this is really just
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an arbitrary number that i'm throwing
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down here what's more important is what
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this is relative to my utility for other
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things so for example using this scale
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if i said
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two scoops of ice cream my total utility
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is 140
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80 and 140 aren't what matter what
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matters is the ratio between the two so
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if i said my utility for one scoop of
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ice cream was 800 then if this ratio is
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true then for two scoops of ice cream my
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total utility would be 1400 it could be
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8 million and 14 million what matters is
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the relative utility i just happened to
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anchor on one scoop gives me eight units
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total utility units but let's keep going
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if we go with this scale then three
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scoops of ice cream let's say that this
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gives me 180 units of utility and i know
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what you're saying well even if you get
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the ratio right how do you even know
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that this is the right ratio well
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economists will debate how to measure
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this but there might be ways that you
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could measure it maybe with dollars with
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what people are willing to pay and then
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you can get the ratios you could survey
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people you could say on a scale of ten
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one to ten how happy will it make you if
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you got one scoop of ice cream what if
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you got two scoops of ice cream what if
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you got three and then you would want to
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get these ratios right but of course it
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is an inexact science but people are
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trying to quantify this and let's just
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go to four
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four scoops of ice cream would give you
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a total utility let's say we knew it
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would give you a total utility of
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170.
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now something interesting is happening
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as you got more scoops of ice cream from
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zero to one to from one to two from two
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to three it looks like you are getting
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more utility but then all of a sudden
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when you have four scoops of ice cream
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your total utility goes down a little
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bit
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maybe it's because people can't eat four
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scoops of ice cream and they say what do
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i do with that and they just have
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they're left with a bowl of melted ice
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cream and so it doesn't give them as
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much utility it makes them feel bad
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somehow as having three bowls of ice
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cream or three scoops of ice cream
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another thing to think about is how much
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does the total utility increase every
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time you get an incremental unit of that
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thing and we'll talk about it in more
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depth in future videos but that general
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idea of how much more utility you get
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for that incremental unit and it cut in
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economics when we're talking about what
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happens on the increment we use the word
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marginal a lot
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marginal
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utility
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utility sometimes abbreviated mu
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and this would still be in utility units
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and so we could start with that first
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going from zero to one i'll start with
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that first scoop of ice cream what's the
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marginal utility well it gave you an
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incremental 80 units of utility so the
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marginal utility is 80. now what about
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that second scoop of ice cream well we
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know when you had one you had 80 total
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utility units and now when you have two
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you have 140 so that incremental second
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scoop gave you to go from 80 to 140 it
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gave you 60 extra units of utility
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so notice you were really you really
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increased your happiness or you got a
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lot of value out of that first group and
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you still got value out of that second
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scoop but it's a little bit less because
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you're not maybe just as hungry you're
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getting a little bit tired of the ice
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cream and then that continues to happen
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on that third scoop to go from 140 to
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180 that third scoop gave you 40 units
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of utility
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and then as we talked about when you add
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on that fourth scoop it didn't even add
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to your total utility it took away from
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your total utility so it actually had a
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negative marginal utility it is negative
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10. that fourth scoop actually took away
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from your happiness so i will leave you
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there you have this idea of utility
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total utility and we also looked at
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marginal utility and you see in this
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example and this is typical that
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marginal utility typically decreases as
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you get more and more units of that
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thing
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and in future videos we're going to use
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this framework of utility total utility
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marginal utility to think about how
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folks might make rational decisions to
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optimize their total utility
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