Utility, or usefulness, is the (perceived) ability of something to satisfy needs or wants.
Utility, or usefulness, is the (perceived) ability of something to satisfy needs or wants. Utility is an important concept in economics and game theory, because it represents satisfaction experienced by the consumer of a good. Not coincidentally, a good is something that satisfies human wants and provides utility, for example, to a consumer making a purchase.
Historically, two approachess existed to measure utility:
- Ordinal utility theory states that while the utility of a particular good or service cannot be measured using a numerical scale bearing economic meaning in and of itself, pairs of alternative bundles (combinations) of goods can be ordered such that one is considered by an individual to be worse than, equal to, or better than the other. The concept was first introduced by Pareto in 1906.
- Cardinal utility treats the magnitude of utility differences as bearing an economic meaning and being an ethically or behaviorally significant quantity. In neoclassical economics, cardinal utility is considered outdated except for specific contexts such as decision making under risk, utilitarian welfare evaluations, and discounted utilities for intertemporal evaluations where it is still applied. Elsewhere, such as in general consumer theory, ordinal utility is preferred.
Utility as a concept is used in Consumer theory and Welfare economics.