Foundation Series: Intro To Utility Curves

economics class

Utility is an abstract concept usually relegated to economics. What is it? How does it work?

Definition of Utility

The economic definition of utility is

An economic term referring to the total satisfaction received from consuming a good or service

The Free Dictionary

That doesn’t helps us very much – but visuals make this concept strikingly clear.

Consider money. Everyone likes money. People derive satisfaction, or utility from money. The more money they have, the more satisfaction they get from it.

utility of money

Note that the law of diminishing returns is a factor here. As someone acquires more money, the same size of increase in money does not result in the same size increase in utility. $10,000 would provide a lot of satisfaction to someone working at minimum wage. It would provide much less (but not zero) satisfaction to a billionaire. That’s the law of diminishing returns.

Looking at another concept – leisure time. When someone increases their leisure time, it increases their satisfaction.

utility of leisure time

Again, we have the law of diminishing returns. An extra hour of leisure time in a week is very valuable to a single parent working two jobs and raising three kids. That same hour is less valuable if the person has no responsibilities or time commitments.

Tradeoffs

While both graphs make sense, what they can’t tell us is if someone would rather have more leisure time, or more money. When we present this as a tradeoff, we need a way to describe how people make those tradeoffs.

Our intuition is that people with a lot of free time would rather have more money, and people with a lot of money would rather have more free time. That’s good intuition. When we graph leisure time versus money, we have a utility curve.

utility curve of time vs money

Economists also refer to this as an indifference curve. For someone who is on any point on the curve, they are indifferent to being on any other point on the same curve. When a person has very little money, they will trade a lot of leisure time for more money. When they have a lot of money, they will trade a lot of it for a small increase in leisure time.

This is one of the reasons our economy works. People with a lot of time sell something cheap (their time) to people with a lot of money, who will pay dearly for something that is expensive to them (their time).

Not everyone has the same shape of utility curve.

utility curve shapes

Some people inherently like money more than time, or vice versa. Or a person’s situation is such that they temporarily shift their values. Each individual has a unique curve at a unique point in time. And for that person, all points on the curve provide equivalent satisfaction.

Improvements

OK, understanding tradeoffs is nice, but what we want to understand more is how to improve the human condition. Products are not very compelling when people are indifferent about buying them. How do we make people want to buy our products?

People want to increase their utility. If someone is indifferent to trading an hour for a dollar, they would be excited to trade half an hour for a dollar. Conversely, they are uninterested in trading two hours for a dollar. Graphically, in addition to being indifferent to all points on their curve, they are excited about all points above their curve, and uninterested in moving to a point below their curve.

increasing utility

Rational people (and economists make a point of excluding irrational people from most of their work) will at least be content, and usually prefer to increase their utility.

Why Indifference Curves Never Intersect

You’ll notice that the two curves in the figure above are never cross each other. Indifference curves never intersect, because by definition, all points on the same curve represent equivalent satisfaction. If two curves were to overlap, then that would create a graph (for a single individual) that looked like the previous graph (with red and green curves).

Pick a single point on the “Money” axis. There are two intersections along the “leisure Time” axis – one each for the red and green curves. The red data point must have the same utility as the place where the curves cross. The green data point will also have the same utility as the place where the indifference curves intersect. This would require both the red and green data points (with different values for “leisure Time” and identical values for “Money” would represent the same amount of utility.

That would violate the premise that “more leisure time is always better, when all else is equal.” This also hilights a limitation of using utility curves – they only apply to monotonically increasing functions. Only when “a little bit more” is always better, can a utility curve be drawn.
Practical Application

This is fine, if theoretical. How do we use this as part of developing great software?

Now that we understand how people treat tradeoffs, we can look at prioritization of requirements. The key is to recognize that there are tradeoffs. As creators of software, we are faced with internal tradeoffs. We can only accomplish so much. We can only release a certain number of features in a given timebox. And we make those tradeoffs based on ROI, or our perception of the balance between costs and return.

Sometimes return is measured in purely financial terms. Sometimes, that return is measured in utility. Consider the decision process around a set of usability requirements. Should we make the application easier to learn, or faster to use?

A utility curve helps us visualize this tradeoff.

speed of learning vs ease of use

The answer is some of both. But we have to balance the need to get past the suck-threshold with creating word-of-mouth marketing and driving user adoption by designing for the competent user. Understanding that each user has their personal set of tradeoffs helps us make these decisions.

One thought on “Foundation Series: Intro To Utility Curves

  1. the curve of diminishing returns can be extended to cost-effectiveness issues – once utility reaches 90% of presumed 100% potential, further investment of time / money / resources is wasteful. In short, 90% is the utilitarian 100%

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