Definitions of Utility, Value and Price

Utility

Utility is the ability of a good to satisfy a need of a person who consumes this good.

Utility Functions

A utility function assigns every bundle of goods a real number.

The simplest case is for a single good.

This utility function shows the ideal model. The more, the better.

The following utility function shows saturation. While the total utility rises with every additional unit, the absolute amount added declines. At some point, the curve might move horizontally.

But there are many more conceivable utility functions.

The next one shows saturation and after the saturation point a decline in utility with every additional unit.

The next utility function displays a necessary minimum amount.

The last one shows the utility of a “negative” good. Here, the utility declines with every additional unit consumed.

Indifference curve

Indifference curves show combinations of two good or commodities that lead to an equal utility for the consumer.

Imagine, you have 1 kg of apples and 1 kg of pears. This bundle gives you a certain utility. Now, the amount of apples is reduced and the amount of pears increased. How many more pears do you need to get the same utility like before?

An indifference curve answers this question.

Value

The value is the amount of money a consumer is maximally willing to spend for a certain good. The value can depend on the situation.

Imagine you thirsty and you need some water. The stronger your thirst, the more you would be willing to pay for a bottle of water.

Price

The price is the agreement point of seller and buyer. It must lay between the value of the seller and the value of the buyer. Otherwise, at least one party would not accept the price and the trade would not happen.