Hi, good evening everyone. So today we are going to go ahead and start with chapter 4 of Varian and this is called as Utility. Let's try to understand a bit of the background of Utility. Let's try to understand a bit of the background of Utility.
And where did the concept of Utility come from? So when we go ahead and when we talk about Utility. try to understand that this concept has been used well before it was introduced in economics. I mean, philosophers or English authors, they were also using this word of utility. And at that time, they were using utility as in order to go ahead and in order to explain the overall well-being of the individual.
How happy the individual is. They were using the word utility to go ahead and explain this overall well-being. Then they went ahead and they started giving a number for utility. And they said that if utility is more, happiness is more. And if utility is less, happiness is less.
So they started giving a number. And he started saying that if that number is more, then utility is more, happiness is more. And if that number is less, then utility is less and happiness is also less.
So utility started being used as a measure of the happiness of the people. So please write it with me. Write down that in earlier period, philosophers and economists used the word utility to explain just give me a minute let me change the pen to explain overall well-being of the individuals So, to determine people's well-being, the utility word was used. Then, utility was used as a numeric value to calculate happiness.
Then, what did we start saying? In order to give a number to happiness, we will use utility. Right. So, for example, if individual A, his utility is 10 utils.
Utils means in which we are measuring utility. Like we measure weight in kgs. Right. We measure length in centimeter. Right.
Meter. We measure distance in. kilometer, meter.
Aise hi we measure utility in utils. Utils is the measure used to measure utility. Thik hai. Toh ab humne bola ki individual A ka utility is 10 utils aur individual B ka utility is 4 utils.
So we will say Individual A is more happy. than individual B. A is more happy than B. So, what is the aim of any individual? Any individual aim will be to maximize their utility.
What will be the work of any individual? That whatever utility they are getting, whatever utility they are getting, they would want to go ahead and maximize that. So, please write down that the aim.
of any individual would be to maximize their utility. Now, there was one issue with this. Right.
So, the issue is that how do we quantify this? amount of utility with different choices, right? I mean, if I have to compare utilities, how will I quantify it, right?
So, for example, let's say that I think that one util is giving me 10 minutes of Laughter. If I laugh for 10 minutes, I will get 1 util's satisfaction. This is what individual A thinks. But individual B, he thought in a different way.
Individual B thinks that 1 util gives him 5 minutes of laughter. Now both these individuals, individual A and individual B, they go to watch one comedy show. So here we have a comedy show going on and these two individuals, they are going to watch this comedy show, individual A and individual B. The show was of one hour, they kept laughing, it was a good show.
And after coming back, individual A tells that you know what, I got 5 utils from this show. Kuch bhi satisfaction mil sakte hai. So I got 5 utils from this show.
Or individual B bhot hai, you know what, I got 10 utils from this show. We laughed. I got 5 utils from this show.
I got 10 utils from this show. What will you say? You will say that individual B. Just if I don't give you any more information, I don't give you this information because this is their psychological information.
This is in their mind. This is in their mind. Okay, how they are measuring utilities in their mind, right?
But as a layman, if I look from outside, what will I say? That individual B must have got more satisfaction than A. But is this true?
Answer is no. Because 10 utils is 50 minutes of laughing. And according to this, 5 utils is also 50 minutes of laughing. Because he gives 1 util when he laughs for 10 minutes.
He gives 1 util. So 5 utils is 50 minutes of laughing. And here 10 utils is also 50 minutes of laughing.
So both have laughed same. Both are... equally happy but if I just look at the numbers it seems that B is more happy right or not?
So concept of utility is very psychological. It is going on in people's mind. So we can say that concept of utility this is also called as classical utility.
Classical economist. concept is very psychological and it is dependent on how consumers measure utility. This depends on how I take utility in my mind and how you take utility in your mind.
Right? So this is very, this is dependent on individual to individual. This is not independent concept. Right?
So because of this, this way of utility was not used. Okay? Therefore, economists changed the way they thought about utility.
We will discuss this in detail. I'm just starting with the topic. So economists, they changed the way they thought about utility and they said that utility it is only a way to describe preferences.
It's only a way to describe preferences. If individual A says that he gets more utility from A than B, means he prefers to buy A over B. If I say that there are two fruits, kiwi and apple, and I am getting more utility from kiwi as compared to apple, it means that I will purchase kiwi.
How much utility I don't want to know. Do you understand? So, I don't want to know the numbers.
Number is something which is something which we cannot tell. It is dependent from human to human. There is no formula in number calculation.
There is no formula. So, no one can tell us that how much one utility is equal to. This is dependent on human to human. So, there is no way I can calculate utility. calculate utility in utils and therefore what I want to do is ultimately I want to rank the bundles.
So when we give utility in terms of numbers, this is called as cardinal utility concept. When we tell that how much utility is getting from which bundle, that is called cardinal utility. That is called as cardinal utility concept. And when we are only concerned with ranking of the bundles, That is called as ordinal utility concept, right? So please write down cardinal utility is when you give utility in terms of numbers.
Ordinal utility. is when you just rank the bundles. You're only concerned with ranking.
Okay. We just want to know which bundle will come above which. It does not matter what the number is.
Right. I am only concerned with the preferences of the individual. For example, if I tell you that bundle A, it has one car, two TVs. And bundle B, it has two car, zero TV.
And I am telling you that individual prefers bundle A over bundle B. It does not matter what the number is. Mujhe farak nahi padta. Utility of A can be hundred and utility of B can be zero.
Or utility of A can be 101. Utility of B can be 100.99. Or utility of A can be 1. Utility of B can be 0. Does not matter. What these numbers are does not matter. Mujhe farak nahi hai ki ye numbers kya hai. long as this is intact that utility from a should be more than b right so basically what we are saying that we are only concerned with preferences in ordinality we are only concerned with ranking right we are not concerned with magnitude right Whether this is 100, 0 or 101, 100.99 or 1 or 0 does not matter.
Magnitude is used for the purpose of ranking. magnitude does not hold any importance itself magnitude does not have any importance in itself magnitude does not have any meaning in itself whether you write 100, 1 lakh or 2 lakh we use these numbers only for ranking so our ultimate aim is ranking our aim is ranking our aim is not to give numbers are you understanding this? so please write down The only property of a utility assignment is how important it is to order the bundles.
So only ordering is important, right? The magnitude of utility function is only important insofar as it ranks. different bundles, right?
The size of the utility difference does not matter. So size does not matter, what is the gap? Are you understanding this?
So again, I will take one more example. So for example, there is bundle A, B and C. According to individual 1, he gets utility of 3 from bundle A, 2 from B and 1 from C.
So it means that according to individual 1, A is preferred over B is preferred over C. Now let's come to individual 2. According to individual 2, the utility is 17, 10 and 0.02. So if I look at the utility, again 17 is more than 10 is more than 0.02.
So utility of A for individual 2 is more than B is more than C. Now I am saying that the difference does not matter. So whether this is 3 and this is 2, gap is 1-1 between the utility or whether the gap is 7, it does not matter.
I am only concerned with ranking of the bundles. I only care about ranking. So for example, if I take another individual, individual 3, And utility of individual 3 is minus 1, minus 2, minus 3. Again, minus 1 is greater than minus 2 is greater than minus 3. Negative may, minus 1 is more, minus 2 is more than minus 3. So, for individual 3 also, utility of A is more than B is more than C.
So, it does not matter whether I give these numbers or these numbers or these numbers. All three represent the same preferences. The set of numbers that we have written, they represent the same thing.
That A is preferred over B is preferred over C. Right? So only ranking of bundle matters.
Only ranking matters. Right? There is no unique way of assigning utilities. I mean, no matter what number you give, there is no unique way.
You can give number 150, 10. You can give number 3, 2, 1. Does not matter, right? So, you can give any number. Instead of 3, 2, 1. If I multiply with 2 also.
And I give the numbers 6, 4 and 2. It does not matter. This 6, 4 and 2 also represent the same preferences. Yeh bhi vahee baat dikha rahe hain, that A is preferred over B is preferred over C. So, numbers don't matter.
Only ranking of the bundle is important. Right? That is the concept of ordinal iterative.
Okay, beta. I'll end the session.