What is Economic Utility? • Economists define economic utility as the personal financial price somebody gives to products/services or asset that satisfies a need /want.
Utility and Preferences • Utility takes into account the person's first choice with a particular need/want.
Utility, rationality, and desirability • The "Economic man" and "Rational choice" theories assume that utility is what guides people's economic decisions. • Rationality: What would be the wise decision to purchase this need/want. • Desirability: What do I want over need?
Utility and Value • In the sense that economic values are estimates of what things could be worth, utility is a relative economic personal value. • This means that it is a number that allows the person to make comparisons with the utility / value it gives to other things / to other satisfactions. Therefore, it gives that person a basis to make economic decisions.
Utility and Price • Utility differs usually from the market price and therefore it orientates the person's decision to buy or sell. • This can also mean that the market price is the one that reflects an equilibrium between the utilities/economic preferences of all sellers and buyers. • Where things get complicated is that the economic utility theory considers that people have a precise idea of that number. But precisely this is ...theoretical.
Utility and Risk • In finance, utility takes risk into account. People might prefer: • A certainty to keep or get $100 cash • Than a 50% chance to obtain $200 instead. • They would consider for example that the last offer has for them an "expected utility", not of 200 x .5 = 100, but of only $70. • The discount between the fundamental value of a deal and the expected utility for the player is a measure of its risk aversion.