What is a Utility Function?

Utility function is a means of accurately measuring the desirability of various types of goods and services, and the degree of well-being those products provide for consumers. As part of the process, factors such as customer satisfaction, ease of use, and the rate of consumption by customers is considered key to accurately assessing the utility of the product. This measure is normally presented in the form of a mathematical expression, and can be utilized with just about any type of good or service that is secured and used by a consumer.

Unlike other forms of measuring the success of a given product, the utility function does not concern itself with the amount of return generated for the entity that manufactures and sells the product. Instead, the focus is on the reaction of the consumer to the product. This can allow businesses to get an idea of whether or not customers will actually embrace a product before it is mass marketed, or if the product is likely to be of little worth to consumers and therefore not worth the time or money it would take to produce.

When applying the idea of utility function, it is important to focus on the ability of the product to catch the attention and imagination of the buying public. Once this element is identified, the formula will call for evaluating the degree of satisfaction that a consumer receives from owning the product. A third element has to do with the rate of consumption that is exhibited by consumers. The goal is to determine if the utility function of the product is high enough to make mass production feasible.

Assuming all three of these factors are at sufficient levels to warrant the continued manufacture of the product, the manufacturer will then determine if the cost of making the product in volumes high enough to keep up with the demand is feasible. If the product can be made at a cost that allows the company to turn a reasonable profit, there is a good chance that the company will move forward with offering the product to the public, at least until consumer tastes change and the product falls out of favor.

Utility function can also be employed with investments as well as with goods and services. If investors tend to obtain a great deal of satisfaction from owning a particular stock, and the perceived risk level is low enough to make the option desirable, and investors actively seek to secure more shares as they become available, it can be said that the utility function for the stock is high. Evaluating the utility of a stock is something that investors do continually as they seek to maximize the worth of their portfolios, and stay one step ahead of any impending shifts in the marketplace.