- How general a depiction of rationality is the “rational utility maximize”?
- Utility maximization is as a state in which a person derives maximum satisfaction from consuming a good or service. It can therefore be viewed in terms of increasing and decreasing utility, which will therefore in portray the economic behavior of increasing utility for consumers to encourage the consumption. Total utility therefore means the aggregate satisfaction that an individual derives from consuming a substantial amount of good or service in economy. It is hence, viewed that a person’s utility can be related to the satisfaction he gets in the end. Utility decreases when a person is deprived of a particular good or service. Taking an example of food, a person’s utility increases when one has not eaten for a long time and is therefore craving for food, however, as the individual continues to eat, his utility goes on increasing as his level of satisfaction increases, commensurate with the person becoming full. His desire for food decreases once he is satisfied has had enough of the food and does not want any more of it. The total amount of utility that an individual deprives is commensurate to his level of satisfaction (Weber 1920).
- Economics use this concept when attempting to depict the market characteristics in an ideal situation. The more a person consumes a particular good or service the higher that person’s utility will be. Organizations play a crude game when they want to increase demand for their products in an attempt to increase profits by hoarding off their goods which are essential in the market, waiting for demand to increase, prices will inadvertently go up, and therefore, supply their products in limited amounts to take advantage of the high prices (Hahn & Hollis 1990). When goods like petrol are in low supply, the people’s utility is likely to be low as their level of satisfaction is low, they will buy the commodity in bulk when given their chance to increase their level of satisfaction in the process increasing their total utility. During this period, organizations and salespersons make a lot of money for the bulk sale of their commodity as consumers try to satisfy their utility.
- Total utility is accompanied by marginal utility which is the added satisfaction or the quantity of utility that a person gains from every extra or additional unit of a particular good or service that an individual consumers. As opposed to total utility that increases with increase for product consumed, it reaches a point regarded as marginal utility where for every extra unit consumed, the marginal utility decreases. This is a clear case of the law of diminishing marginal utility. There is a certain threshold in an individual’s level of satisfaction as it reaches a point where, instead of satisfaction increasing with consumption, it starts decreasing. This can be demonstrated when there is abundance in a particular commodity (Schumpeter 1991). Where a person has consumed to the point of no feeling hungry and is considered to have had enough, any extra unit only serves to reduce his level of satisfaction as he has already had enough, extra consumption may lead to related diseases such as constipation. The consumer will no longer enjoy the same level of fulfillment once that threshold level has been crossed. An ice-cream bar can show this presentation. (Weber 1920).
- Ice cream eaten
- Marginal ice cream utility
- Total ice cream utility
- 0
- 0
- 0
- 1
- 60
- 60
- 2
- 50
- 70
- 3
- 10
- 80
- 4
- 5
- 90
- The table above shows that the level of total utility increases as the individual continues to consume, but at a much slower rate as compared to the rate at which marginal utility decreases with every ice cream eaten. The law of diminishing returns has been very instrumental to economist in helping them comprehend the law of demand as well as the reason for the negative sloping demand curve (Weber, 1920). This concept is certainly used by companies to increase their sales due to the notion that the less of a product you have the more gratification you get from every additional unit you consume as long as the threshold level has not been reached. The marginal utility to derive at this point is very high increasing your willingness to purchase the product. In a bid to gain insight and understanding towards the utility and total utility of a product, economist direct their attention towards the demand theory that explains consumer behavior and satisfaction.
- According to economists, a consumer is assumed rationale in his behavior of wanting to satisfy his want and maximize his total utility by wanting to buy a variety of products instead of purchasing more of a similar type of product. They seek to satisfy their want which can only be maximized by having a little of all instead of more of one commodity and lack of the rest. This will be portrayed in that, instead of using all your money on buying 3 ice cream cones that have a utility of 80, the consumer may buy one cone that has a utility of 60 and later on a glass of milk that has a utility of 50. This grouping will give you a combined input or utility of 110 but at a similar price the 3 cones would have cost (Schumpeter 1991).
- There are two major utility used by economists in their attempt to show the relatedness of consumption and utility that is; the cardinal utility and the ordinal utility. The cardinal utility invokes the utility function to be quantifiable as long as the preference or liking of a particular good or service can be determined with a given level of accuracy and precision by the use of a given criterion. For example, suppose that eating a chocolate bar gives half the satisfaction as compared to eating an ice cream. This utility is taken to be measurable as long as a given criterion is used and which can enable an independent person use the same criteria and attain the same results accurately. This is what came to be known as cardinal utility that portrays utility that can be measured in a precise manner by the use of a certified criterion. There are various assumptions, which involve the cardinal utility concept, including (Schumpeter 1991);
- This is what brings in the difference in that, ordinal utility states that, a good’s utility cannot be measured numerically by an individual in his bearing of deciding whether one commodity is better than another commodity. The ordinal utility is used to formulate the indifference curves that seek to show the equal satisfaction that is derived by two goods by the consumer. An indifference curves is used to show the combinations of two goods that provide the same amount of satisfaction. The ordinal utility concept brings forth the assumptions that individuals are rational in their decision and desire to satisfy their wants and that utility cannot be measured numerically (Haas, 1990).
- The economists take advantage of the rational utility maximizer lie to keep the government from intervening in the market, which would have purposed the good of all people. Example is the government would intervene in the market to ensure that unscrupulous traders do sell their low quality goods in the market. The economists put a strong front that the government has no clue as to what consumers require. However, the government has a reason to intervene to keep the consumers from exploitation, as they will be left to clean up the mess (Weber 1920).
- The depiction of rationality in an economic angle can be described as the hybrid between choosing to do the best and abstraction (Weber, 1920). Focusing on economic meaning of rationality, scholars define it as an assumption of the economic theory. This means that economical man has a rational utility maximizer. However, the rational is not limited to computational resources. Many of the economic activities in an organization succeed after management of an organization is able to offer the best computation. Therefore, man is the rational utility maximizer because has the power to make decisions that cause effective changes in an organization. The decisions also affect the economic status of the organization and the government at large. Human resource that comprises of human energy in an organization determines the ability to give a certain amount of products or services (Weber, 2002).
- According to Weber (1920), he explain that the economic way of understanding human behavior is that everyone is responsible for maximizing utilities. This means that every one acts rationally. This derives to the point that man is eternally a utility maximizer. This may imply while a person is in office that might be in public or either private. It may also imply while a person is in church or any other environment depicting there is operations going on that may add economic value to a country. Rationality has power and man uses it to make decision that may be of advantage to him and the entire organization. Moreover, maximizing behavior together with market equilibrium determine the economic position of an organization. Man is eligible to make various political decisions that may affect the economic progress of an organization. This means that man is the utility-maximizer of various political conducts that may shape the economic situation of a country (Weber, 1920).
- Economists claim that the rational choice of every focused person ought to be goal-orientated in order to offer the best of economic value. The justification behind this claim is that purposeful human behavior has the opportunity to offer explanatory choices that may help in generation of positive economic outcomes (Weber, 1920). Man has the power to determine the market equilibrium through rational choice. This means a person has an obligation to choose what is effective in matters that relate to exchange transaction. Moreover, a person has an obligation of determining price of a certain product and resource allocation to different in order to enhance the well being of an organization (Weber, 1920). This leads to establishment of economical harmony that contributes to positive economic appreciation.
- Rational choice in the business world tends to be different with traditional economics. The reason for this fact is that rational choice assumes the market choice for any organization playing part in determining the economic stability of a region also considers non-economic values. For example, marriage, political and religious value. The rational choice also considers other implicit markets. This means that social markets exists and operates alongside their related convectional economies. However, the social market operates from utility maximization. Human behavior plays a major role in ensuring there is equitable distribution of resources in an organization (Weber, 1920).
- The advantage of having a rational approach of various issues is that an organization manages to cope with the current competition existing in the global market. Nowadays global market experience high increase in the rationalization of economic enterprises. However, the rationalization is compatible with the modern demand in the market especially in public finance. For example Weber (1920), states that most of the western countries apply rational choice in their economic evaluation. Some of the methods that most of the economists use to measure economic action include the allocation between present and future utilities. Both of the utilities help an organization to save more of its regional sources therefore making profitable accounts at the end of financial year. The other typical measure of rational value in an organization is systematic allocation of utilities that help an organization achieve the best in their operations (Weber, 1920).
- Rationality means making choices and preferences that would contribute in helping an organization achieve its best and make recommendable financial outcomes. This means that each individual taking part in the well-being of an organization have an obligation of giving objectives in an efficient way. This means that all the contribution made by stakeholders ought to be of an advantage to the organization. This helps in adding the economic value and acts as one of the ways that economists construe rationality. Most of the economists view that rationality helps to solve the problem of social organization. Therefore, organizations ought to employ rational choice in order to decrease the risks that emerge from negative acts of social bodies. This means that rationality prevents bad people from doing harm to an organization leading to economic degradation. Rational choice helps most of the organizations to associate well with their customers leading to more business activities that contribute to an increase in economic value and wealth (Weber, 1920).
- Philosophical aspects are very vital in economical analysis since they expand on some aspects of economics that are not well elaborated. There is a huge difference between philosophy and economics especially when it comes to analysis. However, through philosophy, various concepts in economics can be elaborated to ensure that the concepts are well understood. To be capable of understanding fully economics concepts, one has to master all the concepts of philosophy and economics.
- One of the key philosophical significance of the economic analysis is concerned with the conceptual aspects of economics. This usually influences the methodology and the epistemology that are essential in accomplishing economics. Philosophical aspect of economics also determines the ethical value of some concepts in economics. According to economics, there are rules that are controlled by both the demand concepts and supply aspects. The high demand of commodities in a given place might affect the nature of ethics in the areas. For instance, in the marketplaces, the business enterprises might decide to increase the prices of the commodities. This will automatically influence the customers in the marketplaces since they will be affected by the increase in the prices. In such places, this might affect the poor members of the society since they cannot afford the high prices.
- However, to the rich, the prices might be still attained since they got readily available capital. In such a situation, philosophical concepts might be used to explain the situation. In some extreme cases, a salesperson might feel comfortable to hike the prices of a given commodity especially when selling to the rich (Hollis, 1989). However, the same salesperson might feel it wrong hiking the price for the same good to the poor members of the community. This can also be well elaborated by the philosophical ethic value in economics. Because of the philosophical values that the salesperson has obtained through a combination of economics and philosophy, the salespersons find it wrong to increase the price of the good for the poor student (Hollis, 1989).
- Philosophers are cannot be compared to the empirical researcher who spend most of their time to study the effect of economy to any given nation (Hollis, 1989). Economics usually study the effect of the inflation on the economy of any given nation. Through the intensive research that the economists usually carry out, they come up with figures, graphs and tables that explain the situation. However, because research details obtained is usually complicated, the common citizen cannot be in a position to understand the results displayed.
- At this point, philosophers usually assist to ensure that the other members of the organization understand the economical concepts. This is usually important when it comes to explanation of the methodology study of the happening and the factors that affect the economical aspects. The philosophers are usually prepared to analyze the rational concepts that are explained by the economics (Hollis, 1989). They logically understand the concepts of the economics before they can interpret the same to the local citizens. This makes the complicated and sophisticated statistics to be simply interpreted hence simpler computations are obtained. The philosophers also try to relate the theoretical concepts that are derived to the actual day-to-day life. Philosophers also post various diverse questions to the economics especially concerning the already research issues. The economics respond to the questions by giving more predefined answers that assist in the elaborating the economical analysis to the people (Hollis, 1989).
- Reference
- Haas, E. B. (1990). When knowledge is power: Three models of change in international organizations. Berkeley, Calif. [u.a.: Univ. of Calif. Pr.
- Hollis, M. (1989).The Cunning of Reason. New York: Cambridge University Press.
- Schumpeter, J. A., Swedberg, R., & Augello, M. M. (1991). The economics and sociology of capitalism. Princeton, N.J: Princeton univ. Press.
- Weber, M. (1920), The Economy and Society. Berkeley, Calif. [u.a.: Univ. of California Press.
- Rationality- the consumer is assumed to be rational. He seeks to use the limited income that he has to satisfy maximize his utility.
- Utility is measurable in a cardinal manner- it is possible for utility to be measured in a cardinal format by use of numbers such as 1, 5, 20, 100 etc. using cardinal numbers enables the consumer to determine in order of preference the utility that can be deprived from selected products.
- Money’s marginal utility does not change- the cardinal utility of money that is spent on purchasing a product or service should not change.
- Diminishing marginal utility- stresses the fact that as consumption increases; the marginal utility for that product goes on diminishing.
- Independent utilities- the consumption of a good that derives the given utility is a function of only that commodity. It is highly independent of any other commodity consumed. Such commodities possess independent utilities.
- Introspection method- this concept helps to explain the fact that the marginal utility of a product as portrayed in the mind of another person can use self-observation to help him judge. For example, the more a person purchases a commodity, the less satisfaction or gratification derived from the extra units.
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