Eco -2025 Utility and Demand

Level 3 eco -Utility and demand definition and laws

Utility

The satisfaction gained from consuming a product

Marginal Utility

The extra satisfaction gained from consuming one more unit of a product

The law of diminishing marginal utility

As more of a product is consumed, the utility gained from each additional (next) unit will decrease

Total Utility

The satisfaction gained from all the units consumed

Optimal Purchase Rule

To maximise total utility, a consumer should purchase more of a good, up to where P=MU

Price elasticity of demand

Price elasticity of demand measures the responsiveness of quantity demanded of a good and service to a change in its price

Elastic demand

Elastic demand is when QD changes by a larger % than the price change (PED>1) and consumers are more sensitive to a given price change

Inelastic demand

Inelastic demand is when QD changes by a smaller % than the price change (PED<1) and consumers are less sensitive to a given price change

Unitary elastic demand

Unitary elastic demand is when QD is exactly proportional to a given change in price (PED=1)

Determinants of elasticity

Substitutes, Proportion of income, Luxury, Addictiveness, Time

Cross-price elasticity of demand

Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in price of another good

Income elasticity of demand

Income elasticity of demand measures the responsiveness of the quantity demanded of a good or service to a change in income