Sometimes, entrepreneurs have the impression that if they hire more people to make sales, they will increase their business profit. Often, the result of this action can be just increased costs. It happens because they don't know how to calculate expenses and forecast results.
The utility function allows us to observe the maximum number of employees and equipment which we can put into operation in order to obtain maximum profit with minimum resources.
This concept could be applied both in the company's economy and in macroeconomics. Today, we will tell you how to apply it within your company.
Let's define some terms:
Utility - from an economic point of view, itis the satisfaction or pleasure felt by a person after consuming a certain good or service. Assessing the usefulness of a particular good or service is subjective. The same good or service may be useful to one person but useless to another.
Total utility (Ut) is the total satisfaction felt by a consumer after consuming a certain number of the same goods or services.
For example, a lady can buy one, two or three skirts of the same cut. The satisfaction felt after buying her first skirt is, say, 5, the second has a utility of 3, the third - 0. Ut = 5 + 3 + 0 = 8.
Marginal utility
Theoretically, marginal utility answers the question: "What is the additional utility that the consumption of an additional unit of a certain good brings?".
In consumer behavior, marginal utility (Umg) is the additional satisfaction felt by a consumer after consuming another unit of the same goods or services, the other factors remaining constant.
In the business production process, calculating this indicator helps forecast the income obtained in comparison to the number of machines or people working.
The production process:
Did you know that a three-person team can make much higher sales? In the situation where the fourth person would come, and the work would be distributed, the entrepreneur could find himself in the situation where the three people would not be as efficient, and the team would record worse results. The lack of the necessary space or technology could be to blame.
Imagine how many light bulbs you can connect in one day as a team of three people. How many would you connect if you are a team of ten people and you all have to work on the same object at the same time? People would be sitting „on the bench”, while still being paid. You’ll lose money and still make the same sales.
By definition, marginal utility represents the ratio of total utility in a situation when the quantity of a consumed good changes by one unit. Marginal utility decreases as consumption increases.
This is a concept often used in the context of maximizing utility. Thus, at the optimal point, the marginal utility of a good must be equal to the marginal costs. A marginal utility that takes the value zero shows a saturation.
To cut a long story short, you should sit and calculate the ratio between the amount of work, the sales made and the number of employees. You might surprisingly find out that you pay people for nothing, that they interfere with each other and make the situation in the office or factory worse. You could even decide to set up a team of 10 people instead of 50, and keep those who can do their job well while not being pressured by the lack of space or technology to work with.
