Economics, 3rd Edition

utility

 to refer to the satisfaction derived from consumption.

utility 

the satisfaction derived from the consumption of a certain quantity of a product

Would you pay 

€75 for these shoes? The 

answer might depend on your gender for a 

start, then it might depend on your tastes. 

Some people might think at 

€75 these 

shoes represent a bargain; others a waste 

of money. What do you think and why?

SELF TEST 

Think about your purchasing decisions. Sometimes you will think you have got a ‘bargain’ and 

other times you turn away from a purchase because you think it will be a ‘waste of money’. In economics, what 

do you think is the difference and why?

Utility is an ordinal concept, what this means is that it can be used as a way of ranking but cannot have 

any meaningful arithmetic operations performed on it. A measure of utility, therefore, can be used to rep-

resent consumer choices in some order but that order tells us nothing about the differences in the values 

we use. For example, if a group of five people were asked to rank different movies in order of preference 

using a 10-point scale (with each point referred to as a util) we might be able to conclude that movie 5 was 

the most popular, followed by movie 3 and movie 8. If, however, person 1 ranked movie 5 at 10 utils, whilst 

person 2 ranked the same movie as 5 utils, we cannot say that person 1 values movie 5 twice as much as 

person 2, only that they place it higher in their preferences. Value can be measured, therefore, by ranking 

but there are limitations to such ranking.

One way in which we can overcome this limitation is to look at value in terms of the amount consumers 

are prepared to pay to secure the benefits of consuming the product. This is called the willingness to pay 

principle. It is highly likely that at some point in your life you will have said something like ‘I wouldn’t have 

that if you paid me’ or similar. How much of our limited income we are prepared to pay is a reflection of the 

value we put on acquiring a good. It might not tell us much about the satisfaction from actually consuming 

the good (the buyer, as we have seen, might not be the final consumer) but it does give some idea of value.

For example, two friends, Alexa and Monique are in a store looking at a pair of shoes. Alexa picks up a 

pair of leopard print high heel shoes priced at 

€75. Monique looks at her friend and frowns – why on earth 

is she thinking of buying those? No way would Monique pay that sort of money for such an awful pair of 

shoes. A discussion ensues about the shoes; clearly there is a difference of opinion on them and thus 

how much it is ‘worth’ it to own this particular pair of shoes. If Alexa buys the shoes, then the value to her 

must be at least 

€75 because that is what she has to give up in money 

terms in order to acquire them. It may be that Alexa would have been 

prepared to pay much more for the shoes, in which case she is getting 

some additional benefit which she is not paying for. Economists call 

this consumer surplus and we will look in more detail at this later in 

the book. Alexa sticks to her guns and buys the shoes; Monique leaves 

the store baffled at her friend’s purchasing decision. Monique clearly 

feels that giving up 

€75 to buy those shoes was a ‘waste of money’.

The amount buyers are prepared to pay for a good, therefore, tells 

us something about the value they place on it. It is not just the amount 

of money we hand over that reflects value but what that amount of 

money could have bought. This highlights one of the Ten Principles of 

Economics – the cost of something is what you have to give up to get 

it, the opportunity cost. We could make a reasonable assumption that 

Monique believed there was a way in which she could allocate 

€75 

to get more value – in other words, the alternative that 

€75 could buy 

(whatever that might be) represented greater value than purchasing 

those shoes.

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