Utility function and its characteristics

Buying this or that product, a person is guided by many principles, the main of which is the utility function of the goods. For example, when an individual is hungry, it seems to him that he can eat 10 rolls. The first absorbed flour product seems incredibly tasty, fresh and melting in the mouth. The second confectionery miracle is still terribly tasty, but not so soft. The third bun is a little fresh, and the fourth is already to be diluted with a drink or tea. Having reached the tenth bakery, the person understands that all those buns that he ate - not very tasty and completely not fresh. That is, with each eaten confectionery product its usefulness decreases. Therefore, we can say with confidence that the smaller the buns people used, the higher the valuable properties of each. However, the main goal, namely, the relief of hunger, was achieved, therefore, the product was useful. At the same time, the valuable properties of the first bun were much higher than the last.

This law is characterized by a term such as the utility function. It shows that with the increase in the quantity of goods on the market, its valuable properties are lost, and society no longer wants to acquire what is widely distributed. That is, there is a direct dependence of such two elements as demand and utility. At the same time, the proposal is also of great importance. The higher the level of demand for a particular product, the higher its utility. If the offer of the product exceeds the interest in its acquisition, then its valuable qualities are reduced. Where did this notion come from as a utility function?

In Austria, at one time there was an economic school, whose representatives first tried to establish a relationship between such concepts as the price of a product and the demand for it, as well as between the quantity of the product and its stocks.

The most prominent scientists of this direction were Menger, Bem-Bawerk and Wieser. They proved that there is a direct dependence of price on how much the goods are on the market, while the main condition was limited resources. Representatives of this school have proved that there is a regularity between the utility of the good and its quantity consumed by people. It was the Austrians who were the first to show that the valuable functions of the goods decrease with increasing consumption of quantity. This pattern is given in the form of the example above. At the same time, the total aggregate utility increases very slowly, and the marginal utility decreases. Based on this observation, the representatives of the Austrian school derived the main factor affecting the price. And it is the ultimate utility. The formula for calculating this indicator has the following form:

MU = dU / dQ, where

U is the utility function,

Q - quantity of goods.

Due to the differentiation of the marginal and overall utility, they found the answer to the paradox, which among economists was called "The Paradox of Water and Diamonds." The essence of this issue is as follows. Water should have a greater price for a person than diamonds, because without it society can not exist, unlike valuable minerals. However, in practice, everything goes the other way. The answer lies in the amount of the resource: since the water reserves are huge, the price, respectively, is lower. And diamond deposits are rare, so their cost is quite high.