Utility and demand

The concept of 'utility' was innovated by Jeremy Bentham, founder of the last great school of philosophy to emerge from the Western period known as 'the Enlightenment'. For Bentham sense experiences involved a unit measure of pleasure and pain called the ‘utile’ from which the philosophical school of thought known as ‘Utilitarianism’ emerged.  The utiles would eventually, according to Bentham, be subject to physical measurement and he proposed a ‘felicitous calculus’ of human happiness. In simple terms, Bentham believed that human existence was simply the search for pleasure and the avoidance of pain.  This has been expressed as 'pleasure and pain are the sovereign rulers of the State'. Thus utilitarianism is radically materialistic at the root.

Another name for utilitarianism, as defined by Bentham, is 'ethical hedonism'. The search for pleasure was inhibited in Bentham's scheme by the assumption that human beings carried what today we would call genetic ethic of right and wrong - essentially the  Protestant work ethic.   Once that ethic faded, however, we were left with only 'Me-ism': only my pleasure counts, and anything I do to increase it, no matter the pain and suffering to others, does not matter!

Terms

a) Utility: a generalized term for the satisfaction obtained by an individual from the 'use' of a product (good or service) measured by the price the individual is willing to pay for the product where:

i - total utility - total satisfaction yielded by the product

ii - marginal utility - the additional utility yielded by an additional unit of the product

iii - diminishing utility - at some level of consumption an additional unit of the product yield less utility than the preceding unit, i.e. utility increases at a decreasing rate

iv - maximizing utility: rational individual will purchase that combination of products or commodities yielding the maximum utility subject to income constraint and prevailing prices

b) Consumption: the use of a product whereby its utility is destroyed, or 'negative production'.

c) Income: payment for work used to purchase products in order to obtain utility.

d) Work: physical or intellectual effort made not for any pleasure derived from itself but rather to earn income to purchase products to obtain utility.

e) Price: the current exchange rate of a product for the utility derived by a consumer.

2. Assumptions

a) Rationality: consumer chooses between alternative commodity combinations to maximize utility assuming -

 i - perfect knowledge, that is, aware of all alternative commodity combinations and their prices

 ii - competence, that is, capable of evaluating the alternatives

 iii - transitivity, that is, if A = B and B = C then A = C (which means that indifference curves do not intersect: see 3(b) below)

b) Ordinality: consumer is able to order commodity combinations by level of utility, 1st, 2nd, 3rd etc.  Does not require cardinality, that is, the ability to specify the actual numeric level of utility

a) Utility Function

                U = f (x, y) where:

i - U is the utility derived from consuming commodity combinations of x and y

ii - U is assumed to be continuous (and has first- and second-order partial derivatives) or there is continuity of commodity combinations of x and y, that is, there is an infinite number of combinations yielding the same level of utility, U is a dense set

iii - U is not unique, that is, any utility number - U' - assigned to a given commodity combination indicates only that it is preferable or superior to all combinations with a lower number and inferior to those with a higher number, in other words, U' does not possess any cardinal meaning

iv - U is defined for consumption within a specified timeframe - long enough to allow substitution among existing commodity combinations but short enough to insure constancy of taste