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What Is Utility Maximization?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 November 2016
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    2003-2016
    Conjecture Corporation
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"Utility maximization" is a term that is used to describe the efforts of the consumer to obtain the greatest degree of utility or value from a purchase, while keeping the cost of that purchase as low as possible. The idea is to derive the most benefit possible, either in terms of quantity or quality, while still managing to spend no more than a certain amount. This concept of utility maximization is often considered a sound approach when it comes to securing goods or services, since the return or utility on the purchases has a direct impact on the financial well-being of a household or a business operation.

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One of the easiest ways to understand the idea of utility maximization is to consider a household that must operate on a limited budget for food. In order to purchase more food items and stretch that limited amount as far as possible, the consumer will employ several strategies aimed at obtaining items for the lowest unit cost. As part of the process, the consumer will approach the task of shopping for groceries by making note of which items are currently on sale, create menus based on that information, then purchase those sale items while they are available at those lower prices. While shopping, the consumer will take care to compare those sale prices with house or store brands to determine if greater savings per unit can be obtained. Assuming the quality of the items selected is similar to those of higher price, the utility is maximized in terms of quantity without sacrificing quantity.

Businesses will also engage in purchasing strategies that lead to utility maximization. For example, a business may enter into a contract with a supplier, agreeing to purchase a certain quantity of goods or services over the life of that contract in return for receiving discounted pricing. This approach allows the company to secure items essential to the operation, but at a lower cost. In this manner, the utility maximization involves saving money while still securing enough of the products to make the effort cost-effective for the business.

While securing greater quantities for less money is one approach to utility maximization, this same general idea can also be applied to the pursuit of quality. Here, the focus is less on getting a lower price and more on receiving a level of quality that the consumer considers equitable in return for the investment. This means that while a business may be able to go with a conference call provider that offers a lower price, the decision may be to choose a provider that has a slightly higher price but is known to provide superior quality in terms of reliable service. In the long run, that decision provides utility or satisfaction that would not be obtained by going with the less expensive service.

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