What is Utility?

What Is Utility?

The concept of utility comes from economists’ efforts to understand why people make certain decisions—particularly decisions involving the consumption or use of goods and services. Utility is inherently subjective, meaning each individual determines the value or satisfaction they gain from something. Economists use the concept of utility to measure both the total and marginal benefits that goods and services provide in an economy.

How Is This Relevant to You?

If you want to make more rational choices, understanding utility can help you identify which options benefit you the most. This understanding supports the optimization of limited resources such as money, time, and effort.

What Is Optimization?

By allocating enough work hours to cover your expenses and lifestyle while still allowing time to socialize, you create a sense of balance. This balance is sometimes referred to as equilibrium. In this case, you have optimized both your work hours and your leisure time to arrive at the most satisfying overall choice.

Optimization means getting the most out of what you have—for example, choosing the best trade-off among a set of options. Consider a situation where you are deciding between going to the movies with friends or taking on additional hours at an hourly job. Working provides the opportunity to earn money, but you may value the enjoyment of spending time with friends more than the wages you would earn during those hours.

This leads to the broader concept of choice. Making a series of decisions that lead to the most logical, data-driven, and beneficial outcomes results in the most rational choices—those from which you gain the greatest utility.

What is Money?

To understand money, we must first understand the concept of trade; exchanging one thing for another. As human beings began to leave their hunter-gatherer lifestyles behind, agrarian (farming-based) societies began to form. With newly found sedentary forms of living, human beings were able to experience periods of surplus. Surplus is defined as having an excess amount of something. Those with a surplus could afford to trade their surplus of goods, such as wheat or livestock, for things that they may need such as pottery or milk. However, beyond a certain point, for example, deducing the barter price of a good may become difficult as a gallon of milk may or may not be enough to trade for a chicken. So what was humanity to do?

At about 600 B.C.E., in what is now modern day Turkey, the Kingdom of Lydia introduced what may have been the first coinage system. They used an alloy of gold and silver, to mint coins. These coins were then stamped by the Lydian government to authenticate their value. The held various sizes and weight to mark different values. Trade was then conducted with these coins, facilitating more efficient trade. In China, during the Tang Dynasty (approximately 700 C.E.), merchants began using promissory notes to avoid carrying large sums of coins. At around 1020 C.E., the Chinese government then began printing paper money.

However, this type of money still represents a promissory note backed by the Chinese government. This means that the paper money could be turned in for the amount of precious metal stated on the note. We no longer have this system. In 1971, President Nixon removed the United States’ ability to convert paper money into gold on an international scale. This removed many currencies, tied to the U.S. dollar, from the gold standard. Paper money then turned to fiat money. Fiat money is backed only by the issuing government’s promise to pay- not gold or any other commodity.