What is the economic definition of utility? Is it possible to measure utility?

Understanding consumer behavior is like decoding the choices people make when they shop or use services. Imagine you're at an ice cream shop. Choosing vanilla over chocolate says something about what gives you satisfaction, or 'utility' in economic terms. Consumer behavior studies how individuals decide to spend their resources on various goods and services. This involves looking at how they allocate their time and money, their buying decisions, and how they react to different kinds of information, prices, and income changes.

Every individual has unique tastes and preferences which drives their buying decisions. An essential part of consumer behavior is understanding that people make choices based on what they believe will give them the most satisfaction, within their budget limits. By examining patterns in these choices, businesses can predict demand and economists can get insights into how to manage resources effectively.

Now, you won't find a 'joy-meter' to measure how happy your ice cream makes you. That's where ordinal utility theory comes into play. It suggests we can't exactly measure happiness from a product, but we can sort our preferences. For example, you might prefer strawberry ice cream over chocolate and chocolate over vanilla.

This ranking is the crux of ordinal utility. Economists use it to understand consumer preferences without putting an exact number on their satisfaction. It's like creating a leaderboard for your favorite desserts without having to score them out of ten. This theory is crucial for models like consumer choice theory, where understanding preferences helps predict consumer behavior without needing precise utility values.

In contrast to ordinal utility, cardinal utility theory tries to put a number on satisfaction. Think of it as giving a score to your ice cream enjoyment, like '8 out of 10'. This old-school approach assumes utility is measurable and that we can quantify how much more satisfaction one good provides over another.

Economists would use techniques such as assigning utils, hypothetical units of utility, to map out satisfaction levels. It allows for a more detailed analysis, but it's tricky since joy isn't a concrete thing you can measure easily. The subjectivity of experiences makes it hard to universally apply. Despite its shortcomings, cardinal utility can be useful for theoretical models and understanding the intensity of preferences.

Diving deeper into the mind of the consumer, consumer preferences reflect what they value and choose over other options. These preferences can manifest in different scenarios - like picking a smartphone based on its features or even choosing a university for its academic reputation.

Preferences are shaped by various factors such as cultural background, personal experiences, and economic status. They are fundamental in economics because they influence demand, market trends, and pricing strategies. Understanding consumer preferences is key to analyzing markets and forecasting economic activity. It requires paying close attention to how preferences are expressed through the actual choices consumers make, especially when facing trade-offs and budget constraints.