Utility is a loose and controversial topic in microeconomics. Generally speaking, utility refers to the degree of removed discomfort or perceived satisfaction that an individual receives from an economic act. For example, a consumer purchases a hamburger to stop the discomfort of hunger and to enjoy eating.
All economists would agree that the consumer has gained utility by eating the hamburger. Most economists would agree that human beings are, by nature, utility maximizing agents; human beings choose between one act or another based on each act’s expected utility. The controversial part comes in the application and measurement of utility.
Cardinal and Ordinal Utility
The development of utility theory begins as a logical deduction. Voluntary transactions only occur because the trading parties anticipate a benefit (ex ante); the transaction wouldn’t happen otherwise. In economics, “benefit” means receiving more utility.
Economists also say that human beings rank their activities based on utility. A laborer chooses to go to work rather than skip it because he anticipates his long-run utility to be greater as a result. A consumer who chooses to eat an apple rather than an orange must value the apple more highly, and thus anticipates more utility from it.
The ranking of utility is known as ordinal utility. It is not a controversial topic; however, most microeconomic models also use cardinal utility, which refers to measurable, directly comparable levels of utility.
Cardinal utility is measured in utils to transform the logical to the empirical. Ordinal utility might say that, ex ante, the consumer prefers the apple to the orange. Cardinal utility might say that the apple provides 80 utils while the orange only provides 40 utils.
Even though no economist truly believes that utility can be measured this way, some still consider utility a useful tool in microeconomics. Cardinal utility places individuals on utility curves and can track declines in marginal utility across time. Microeconomics also performs interpersonal comparisons with cardinal utility.
Other economists argue that no meaningful analysis can come out of imaginary numbers, and that cardinal utility – and utils is logically incoherent.