Utility and consumer preferences

Utility refers to the satisfaction or enjoyment which comes from the consumption of goods over some interval of time. For simplicity, suppose that only two goods are available for consumption. It does not really matter what these are: we simply label the two goods x and y. An individual gets utility from consuming particular bundles of the two goods. The amount of utility obtained is described by the individual’s utility function, which can be written as

where U denotes the individual’s total utility, and Qx and Qy denote the quantities of goods x and y consumed per period of time. The qualification “per period of time” is an important one here; we are building a theory of demand, and demand is a flow concept. Different individuals will, of course, obtain utility from various bundles of goods in different ways and to different extents. However, irrespective of what any individual’s preferences might be, we assume that each person has a utility function which incorporates those preferences. We now introduce the idea of an individual’s indifference curve for the goods x and y.