Economics – Utility | e-Consult

(a) Utility in economics refers to the satisfaction or pleasure a consumer derives from consuming a good or service. It is a subjective measure and is difficult to quantify precisely. (2 marks)

(b) The law of diminishing marginal utility is directly related to consumer satisfaction. As consumers consume more of a good, the additional satisfaction they receive from each unit decreases. This means that the overall level of consumer satisfaction may not increase indefinitely, even if the quantity consumed increases. Eventually, the diminishing marginal utility can lead to a point where the consumer's overall satisfaction plateaus or even decreases. (4 marks)

(c) While the law of diminishing marginal utility is a useful concept, it has limitations. Firstly, it assumes that consumers are rational and make consistent choices to maximize their utility, which is not always the case. Secondly, it doesn't account for factors other than marginal utility, such as social influence, advertising, or brand loyalty, which can significantly affect consumer behaviour. Thirdly, it assumes that the units of consumption are of equal size, which may not always be true (e.g., a small purchase might provide a larger relative increase in utility than a large purchase). Finally, it doesn't fully explain why some people enjoy consuming certain goods even after consuming them repeatedly. (4 marks)