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I am confused about the use of utility in economics and how it relates to allocative efficiency.

At 4:35 and 5:07 in this video (https://www.youtube.com/watch?v=9a3wXj1o91k) he talks about how at the left and right of the equilibrium, total utility is not maximised.

I am unsure of what is meant by "total utility". Is it the consumer surplus added to the producers surplus?

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Utility is not the same as consumer surplus. Consumer surplus is the difference between price an individuals pay and their individual reservation price.

Utility is a measure of gratification that can be completely different from consumer surplus and depending on what kind of utility we are talking about it might not even be possible to assign integer value to it. For example, with ordinal utility you can’t say some good gives you 20 utils from its consumption but with cardinal utility you can.

However, utility should be monotonically increasing function of consumer surplus so it is valid to say that at a point where total surplus is maximized also utility should be maximized.

Also producers also get utility because the higher producer surplus implies larger difference between actual price and their reservation price. Again utility should monotonically increasing function of this.

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  • $\begingroup$ utility term is quite abstract and subjective for a consumer. Depends on place, time, age of user and need-strengh etc. But, it can be assigned ordinal or cardinal value given a valid scale is available. $\endgroup$ – Subhash C. Davar Nov 22 '19 at 14:36
  • $\begingroup$ @SubhashC.Davar I completely agree, I actually mentioned that in my answer but perhaps I explained it wrong please feel free to edit it $\endgroup$ – 1muflon1 Nov 22 '19 at 14:38
  • $\begingroup$ An edit may be executed in the light of my comments if you think that my comment is useful. $\endgroup$ – Subhash C. Davar Nov 22 '19 at 15:29
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    $\begingroup$ @ChristopherUren yes demand is downward sloping but utility function is still increasing in consumer surplus. Again consumer surplus is difference between what you pay and what you are willing to pay. If you are willing to pay 100€ for widget but you pay 50€ you get CS 50€ if you have to pay 40€ you get CS 60€. It goes without saying that the latte must give you higher utility than former U(CS=60€)>U(CS=50€). It’s a misconception to say that CS is decreasing with demand curve yes for a last person who is on the market CS is 0 but CS is area and if you are outside of the market CS and U is 0 $\endgroup$ – 1muflon1 Nov 22 '19 at 23:46
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    $\begingroup$ @ChristopherUren because you don’t get to consume the good. From Demand Supply diagram your can see that the area of surplus is maximized at equilibrium- no other way you slice it you get larger area of surplus so it also must maximize the utility (also in example in previous response I used consumer surplus but it works for producer surplus the same way except you are looking at area above supply) $\endgroup$ – 1muflon1 Nov 22 '19 at 23:48

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