UTILITY OF MONEY

The Perception of Money and Happiness

The relationship between money and happiness is a fascinating and complex one. Initially, when we find ourselves in a state of deprivation, every additional dollar earned brings with it a sense of great satisfaction and happiness. For instance, if we're broke and suddenly receive $100, it can feel like an extraordinary achievement. However, once we reach a certain level of financial stability, the value of subsequent earnings diminishes. An extra $100 might still bring joy, but it won't provide the same emotional boost as the first. This dynamic teaches us that our happiness is not solely determined by the quantity of money we possess, but also by our context and experiences.

Happiness, a fundamental aspect of the human experience, is often overlooked in economic discussions. In economic terms, the vertical axis of a graph often represents utility, a word economists use to describe happiness. However, I believe that "happiness" more accurately captures the true emotions and motivations of human beings. It's what drives us to work harder and strive for improvement. Unlike wealth, which can be measured quantitatively, happiness defies any attempt at quantification. Each individual experiences happiness differently, making it impossible to establish a universal scale. This makes our pursuit of happiness all the more precious and personal.

Measuring wealth is a complex process, as we often struggle to quantify the concept of happiness in monetary terms. While we can express the value of wealth in dollars, it's important to note that there is no standard unit for utility or happiness. Therefore, what we primarily observe is the evolution of happiness associated with increasing income. In this context, it's interesting to note how the marginal utility of money decreases: while an increase in income can lead to an increase in happiness, each additional dollar earned subsequently brings a smaller increase in satisfaction. Thus, although money can contribute to well-being, its purchasing power in terms of happiness tends to diminish as wealth increases.

• More money is undoubtedly better than less: U(10) > U(5), but

• The incremental (marginal) value of an additional dollar gets smaller as our

wealth increases: U(5) – U(0) > U(10) – U(5)