Understand Economic Profits

In order for people to be able to choose between a great amount of goods and services available in the economy, they need to be understood. Making comparisons on prices is very easy; all you have to do is compare. But how do you compare the benefits of different goods and services? How do you compare if it is better to spend $10 dollars on candy or on some notesites?

People are able to compare the two and the experts believe that people do this by assignation of a common measure of happiness for each thing that is there to buy and that can be used. Experts call this type of common happiness utility and imagine if they could in some way get into the heads of the people and measure utility.

Now it is obvious that some people object to the idea of others assigning specific numbers of units of utility to different items, for example, 20 units of utility towards the pleasure associated with eating an ice cream or 70 to the pleasure of looking the sea. Making such specific assignations is known as cardinal utility. People object to cardinal utility because it is unlikely that one makes such valuations, I mean because after all how many units of utility do you receive on a nice bright day or when you are holding your girlfriends’ hand?

A system that has less objections is to think in terms of ordinal utility, in which you simply make order of things. For example, instead of saying that watching the sea gives you 70 units of utility, which would make it more desirable than ice cream, all you would have to say is that the sea is preferable to ice cream. This system is much more intuitive for most people and eliminates the need for measuring things using the imagine unit called utility unit.

What is even better yet is that it has been mathematically proven that you can describe the same behavior of choice by using ordinal or cardinal utility, which means that economists do not have to use cardinal utility.

However it is important to focus on cardinal utility because it is much easier to explain the crucial concept of decreasing marginal utility by using cardinal utility. You can also explain decreasing marginal utility by using the ordinal system, however the math that is involved in doing so is so complicated that normally this is only taught to doctorate students.

Beginner Money Investing Consumer That Maximizes Utility Choosing Between Many Options Given a Limited Budget Economic Utilities Obtaining More of Less