Economists use the word utility to describe the ability of a product to satisfy a customer’s needs or wants. True False
The correct answer and explanation is:
True
In economics, the term “utility” refers to the satisfaction or benefit a consumer derives from consuming a product or service. Utility measures how well a product or service meets the needs or wants of a customer. It reflects the subjective value or pleasure that an individual gains from a good or service, which influences their purchasing decisions.
Utility is a fundamental concept in economic theory because it helps explain consumer behavior. Consumers aim to maximize their utility when making choices about which goods and services to buy, given their limited resources. For example, if a customer buys a smartphone, the utility they gain might come from features like communication, entertainment, or convenience.
There are different types of utility that economists consider. Total utility refers to the overall satisfaction a consumer receives from consuming a certain quantity of a product. Marginal utility is the additional satisfaction gained from consuming one more unit of the product. Usually, marginal utility decreases as more units are consumed, a concept known as diminishing marginal utility. This means each additional unit of the product provides less added satisfaction than the previous one.
Understanding utility also helps explain demand curves in economics. As the price of a good decreases, the marginal utility per dollar spent increases, encouraging consumers to buy more. Conversely, if the price rises, the marginal utility per dollar falls, leading consumers to buy less.
Utility is subjective and varies between individuals because people have different preferences and needs. For instance, a luxury car might have high utility for one person and low utility for another. Economists use utility to model choices but do not measure it in absolute terms because it is based on personal satisfaction.
In summary, utility is the economic term for the ability of a product or service to satisfy the wants or needs of consumers, influencing how they allocate their resources in the marketplace.