The Beechmont Crest Guide to Economics
Utility functions and indifference curves
These are two tools that help economists evaluate individual objectives in the marketplace. (Remember that fundamental rule of economics which states that all individuals have unlimited wants but no one has unlimited resources. Therefore, it is necessary to make choices and accept tradeoffs.)
A utility function is an equation that expresses the relationship between utility and the total number of goods consumed.
To cite a simple case, let us suppose that Jennifer values only jewelry and caviar. (Why not live extravagantly, while we’re at it?)
Jennifer’s utility function will be:
Utility = F (jewelry, caviar)
or
Utility = jewelry ½ x caviar ½
Jennifer would prefer to have more of each good. Therefore, her total utility rises as she acquires more jewelry and caviar.
Suppose that Jennifer has 9 units of jewelry and 25 units of caviar. Her utility function equation then will be:
Utility = 9 ½ x 25½ = 3 x 5 = 15
Indifference curves
An indifference curve depicts all combinations of goods that yield the same utility. The graph below shows two possible utility curves for Jennifer. Jennifer’s utility remains the same at all points along each curve. (In other words, differenct combinations of jewelry and caviar can give her the same amount of utility.)
However, Jennifer’s utility increases with each movement to northwest on the graph, to a higher level curve.
