Utility (economics)

Utility (economics), satisfaction or benefit enjoyed or anticipated from an economic transaction: that which makes individuals put value on certain goods or services. Utility is in theory the object of all economic activity, but attempts to fully define or measure it are as unsatisfactory as they are common, precisely because it covers so many different forms of economic behaviour. In the history of economics, however, it has been tremendously important because it allowed Alfred Marshall and others to go beyond the labour theory of value and other models based on factors of production, and focus on demand as the key to determining prices and other indices of value. It also allowed economists to treat intangible or psychological factors affecting value, instead of the purely material ones analysed by earlier economists. Early theorists tried to develop measurements of utility; later “ordinal utility” theory abandoned these, deciding that utility was only relevant to economists in terms of the relative preference individuals showed for commodities or services. Marginal utility was Marshall's first powerful application of utility theory, and it has subsequently been applied to many problems of supply and demand. Marshall recognized that money has its own utility, and is therefore itself an item of consumption.