Economics Marginal Utility Questions Medium
The relationship between marginal utility and elasticity of demand is that both concepts are related to consumer behavior and the satisfaction derived from consuming additional units of a good or service.
Marginal utility refers to the additional satisfaction or utility gained from consuming one more 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.
On the other hand, elasticity of demand measures the responsiveness of quantity demanded to changes in price. It indicates how sensitive consumers are to changes in price and how it affects their demand for a particular good or service.
The relationship between marginal utility and elasticity of demand can be understood through the concept of consumer equilibrium. In consumer equilibrium, a rational consumer allocates their income in such a way that the marginal utility per dollar spent is equal for all goods and services consumed. This is known as the principle of equal marginal utility per dollar.
When the price of a good increases, the marginal utility per dollar spent on that good decreases. As a result, consumers may reduce their demand for that good and shift their consumption towards other goods that provide higher marginal utility per dollar spent. This indicates a relatively elastic demand, as consumers are responsive to changes in price and are willing to substitute the good with alternatives.
Conversely, when the price of a good decreases, the marginal utility per dollar spent on that good increases. This may lead to an increase in demand for the good, indicating a relatively inelastic demand, as consumers are less responsive to changes in price and are less likely to substitute the good with alternatives.
In summary, the relationship between marginal utility and elasticity of demand is that as marginal utility decreases, demand becomes more elastic, and as marginal utility increases, demand becomes more inelastic. Both concepts are important in understanding consumer behavior and the factors that influence demand for goods and services.