When purchasing a particular product, a person is guided by many principles, the main of which is the utility function of the product. For example, when an individual is hungry, it seems to him that he can eat 10 rolls. The first absorbed flour product seems incredibly tasty, fresh and melting in the mouth. The second confectionery miracle is still terribly tasty, but not so soft. The third bun is a little fresh, and the fourth should already be diluted with a drink or tea. Having reached the tenth bakery product, a person understands that all those buns that he ate are not very tasty and completely fresh. That is, with each confectionery product eaten, its usefulness decreases. Therefore, we can confidently say that the less buns a person consumed, the higher the valuable properties of each of them. However, the main goal, namely, the relief of hunger, was achieved, which means that the product was useful. Moreover, the valuable properties of the first bun were much higher than the last.
This law is characterized by a term such as a utility function. It shows that with an increase in the quantity of goods on the market, its valuable properties are lost, and society no longer wants to acquire what is widespread. That is, there is a direct correlation of such two elements as demand and utility. Moreover, the proposal is also of great importance. The higher the level of demand for a particular product, the higher its usefulness. If the product offer exceeds the interest in acquiring it, then its valuable qualities are reduced. Where did the concept of utility function come from?
In Austria, at one time there was an economic school, whose representatives were the first to try to establish a relationship between such concepts as the price of a product and the demand for it, as well as between the quantity of a product and its stocks.
The most prominent scientists in this area were Menger, Böhm-Bawerk and Wieser. They proved that there is a direct dependence of the price on how much product is on the market, with the main condition being limited resources. Representatives of this school have proved that there is a pattern between the usefulness of a good and its quantity consumed by people. It was the Austrians who were the first to show that the valuable functions of a product decrease with an increase in the quantity consumed. This pattern is given as an example above. In this case, the total aggregate utility increases very slowly, and marginal utility decreases. Based on this observation, representatives of the Austrian school deduced the main factor affecting the price. And it is marginal utility. The formula for calculating this indicator is as follows:
MU = dU / dQ, where
U is a utility function,
Q - quantity of goods.
Due to the distinction between marginal and general utility, they found the answer to the paradox, which among economists was called the "Paradox of water and diamonds." The essence of this issue is as follows. Water should have a greater price for a person than diamonds, because without it a society cannot exist, unlike valuable minerals. However, in practice, the opposite is true. The answer lies in the amount of the resource: since the water reserves are huge, then the price, respectively, is lower. And diamond deposits are rare, so their cost is quite high.