Description
This video explains the very basics of consumer’s preferences, and how to successfully build and understand a utility function. We start with basic rationality axioms, then we draw a utility function, and lastly we introduce the concept of indifference curves.
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Utility is the ‘satisfaction’ we get from using, owning, or doing something. It is what allows us to choose between options.
A preference function therefore assigns values to the ranking of a set of choices. This is useful as it allows us to see consumer behaviour as a maximisation problem: faced with a set of options and a budget constraint, we will choose what satisfies us most.
Utility functions follow the same code of conduct, the same axioms, as preferences, because they are simply numerical representations of them. That is, they are transitive, complete, continuous, and convex, for the same reasons.
The most important thing to point out is perhaps the fact that utility functions do not assign a numerical value to our preferences. They simply indicate order and magnitude of preference, that is, what we like more and by how much.
Learn more by reading the dictionary entry.
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