Econ: What is Utility Maximization?

What is Utility Maximization? Utility maximization is the technical term for the colloquial expression, “bang for the buck”. This refers to getting the most value, enjoyment or usage for the least amount of expenditure in individual purchasing choices. The indifference curve is a theoretical graphic comparison between two goods or services that deliver similar levels of utility, satisfaction or enjoyment, in order to quantify preferences.

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Transcript

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as being well infinite Mohr less so Utility maximization wouldn't

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come up much in your life That is You're not

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too worried about using your pencil after you sharpen it

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so that it's only two inches long before you throw

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it out you just toss it rather than use another

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inch Well utility maximization has to do with decisions consumers

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make as they spend Their limited resource is all right

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now you're this guy You get a modest paycheck You

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have to figure out how to divide it up to

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survive You've got rent food utilities entertainment and all the

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other stuff you need Thio live So the basic question

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with regard to utility maximization for you Well how do

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consumers budget they're spending in order to get the most

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out of it In other words how do they maximize

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utility Or how do you do this Utility maximization has

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to do with value Or rather how you allocate precious

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resource is AII Cash So it produces the most value

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to you the consumer Or set another way How do

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consumers get the most satisfaction from spending their hard earned

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dollars Well question How many gold plated toilets is Jeff

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Bezos founder of Amazon Limited to buy Answer He isn't

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limited by budget He is however limited by the happiness

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Each additional gold plated toilet gets him Well the guy

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has couple hundred billion dollars That's with a B in

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Amazon stock wealth so he doesn't spend a nanosecond worrying

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about resource allocation He just buys whatever he wants No

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no no Mr Yacht broker I'll take two of them

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well but a normal person would probably not take both

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the pink and the green Buffy and Muffy yachts In

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fact they wouldn't even be able to afford one yacht

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of shame Normal people have constrained budgets and before they

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spend their dough they predicted given level of satisfaction they

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quote achieve unquote from hitting that by now button What

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they have to spend is essentially a kind of mathematical

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constraint on there Happiness or utility or ability to make

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their life better What they have to spend is a

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constraint on their budget They need to make tradeoffs among

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the items they need to buy based on the happiness

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each additional unit of whatever gets them So now back

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to the average Joe liberal arts major your big tradeoff

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choices might be more about buying ramen noodles in bulk

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or getting the soft toilet paper hint by the ramen

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You can always borrow toilet paper from the Burger King

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bathroom or you know there's a newspaper laying around somewhere

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This dynamic is called a budget constraint beautifully graphically illustrated

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here for your viewing pleasure Yeah Check this out And

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here's a graph of Jeff Bezos Budget constraint Yeah not

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much constraint you know financially yet Well utility maximization is

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all about these budget choices The goal of utility maximization

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is to get the most value from the money you

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have available to spend As an example We're making tradeoffs

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between toilet paper and Rahman Here we have a budget

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that shows our trade offs of the two Well here's

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an indifference curve which measures the happiness we get from

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each and where the slope of the indifference curve is

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tangent to the budget constraint That's where we have the

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maximum utility IAEA happiness within our budget constraint Getting all

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this all right Now let's talk about another trade off

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You have fifty boxes your last fifty bucks and it

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has to last you nine days until your next liberal

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arts style paycheck comes Costco the discount retailer has super

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bulk boxes of Rahman on sale in a cost for

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one month worth of noodles Well fifty bucks which is

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grey but for the fact that you will be evicted

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in an hour And the cost to remain in your

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hovel into the freeway for nine more days happens to

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be exactly fifty dollars Well that's the amount You pay

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the head bum to tell the other bums not to

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beat you senseless at night and steal your liver while

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you're sleeping on the freeway there So you have a

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trade off here You can either eat or you Khun

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B Sheltered but you can't do both So in theory

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there should be a tradeoff you could make where fell

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Maybe you share a cardboard box with another bum for

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twenty five dollars for nine days and spend the remaining

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twenty five dollars on the well two weeks worth of

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noodles that will get you through until you can collect

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your next paycheck As you rue the day you know

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that you did that whole liberal arts major thing Well

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because economists are economists they have a bunch of mathematical

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formulas to optimize the budget allocation of your precious dollars

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The basic notion behind this math revolves around the idea

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that consumers will allocate their money so that they get

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the most marginal utility for each dollar they spend Right

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Last dollar it's going to go in the best place

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to them Okay Last concept for understanding utility maximization here

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for marginal utility is the amount of extra use you

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get out of buying mohr of something like you need

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some rahmon to keep you alive But you don't need

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like forty pounds of it to keep you alive For

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just nine days A storage locker full of Rahman will

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not do much good for you It would just sit

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around doing nothing right What One pair of pants is

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good for keeping your legs warm and making sure you

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don't get it You know arrested you know been there

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done that But a thousand para pants Well just wasteful

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There's not much marginal utility being gained from that thousand

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pair of you know khaki Dockers So utility maximization involves

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trying to get the most value Out of limited resource

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is such that the N plus one unit then begins

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to decline dramatically in value art Example Like if you

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need two thousand calories a day to basically maintain your

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current weight and one packet of Rahm and his five

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hundred calories Well then if you need to survive nine

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days while you'll want four packets a day for nine

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days or thirty six packets to just keep you alive

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until your next paycheck after nine days At that point

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you hope you can afford to make a change in

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your life and lifestyle But for now you realize that

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you would probably die or at least suffer greatly If

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you went with no Roman for all nine days and

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just tried to survive on water you would gain great

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utility from having at least one packet today for nine

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days But you'd realize that you have lost so much

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weight in living on five hundred calories a day That

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the storage locker of a thousand docker pants would have

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almost no hands that fit you anymore Yeah you would

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continue to gain meaningful marginal value from that second and

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third packets of Rahman a day getting you to a

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fifteen hundred calories a day Such that Well you might

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only lose a few pounds over the course of those

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nine days until you got that golden paycheck That'd be

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just fine And after for four packet today well the

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value of those Rahman noodles begins to decline massively or

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set another way there Marginal utility than approaches Zero Well

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this set of calculations mirrors the marginal utility value model

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with the goal of getting the most marginal utility out

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of each dollar or the most rum and out of

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the dollar which is actually quite a bit of Roman

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and