Utility Theory: Encyclopedia of Management

Quoted from http://www.enotes.com/management-encyclopedia/utility-theory:

Utility Theory: Encyclopedia of Management

Utility Theory

• Utility theory provides a methodological framework for the evaluation of alternative choices made by individuals, firms and organizations. Utility refers to the satisfaction that each choice provides to the decision maker. Thus, utility theory assumes that any decision is made on the basis of the utility maximization principle, according to which the best choice is the one that provides the highest utility (satisfaction) to the decision maker.

UTILITY THEORY IN CONSUMER BEHAVIOR

Utility theory is often used to explain the behavior of individual consumers. In this case the consumer plays the role of the decision maker that must decide how much of each of the many different goods and services to consume so as to secure the highest possible level of total utility subject to his/her available income and the prices of the goods/services.