Economics Marginal Utility Questions Long
Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. It indicates how sensitive consumers are to changes in price and helps in understanding the impact of price changes on total revenue.
Marginal utility, on the other hand, refers to the additional satisfaction or utility that a consumer derives from consuming one additional unit of a good or service. It is based on the principle of diminishing marginal utility, which states that as a consumer consumes more of a good, the additional satisfaction derived from each additional unit decreases.
The relationship between price elasticity of demand and marginal utility lies in the concept of consumer behavior and decision-making. As the price of a good increases, consumers tend to demand less of it due to the law of demand. This decrease in quantity demanded is influenced by the marginal utility that consumers derive from each additional unit of the good.
When the price of a good increases, the marginal utility of consuming that good decreases. This is because consumers are likely to substitute the good with alternatives that provide higher marginal utility at a lower price. As a result, the quantity demanded decreases, and the price elasticity of demand becomes more elastic.
Conversely, when the price of a good decreases, the marginal utility of consuming that good increases. This leads to an increase in the quantity demanded as consumers find the good more affordable and derive higher satisfaction from consuming it. In this case, the price elasticity of demand becomes less elastic.
In summary, the relationship between price elasticity of demand and marginal utility is that as the price of a good changes, the marginal utility derived from consuming that good also changes. This, in turn, influences the responsiveness of consumers to price changes, as reflected in the price elasticity of demand.