What Is the Relationship Between Elasticity & Marginal Utility?

The relationship between marginal utility and unit volume is inversely related. The more a customer purchases of a particular item, the lower the marginal utility will be. In this way, increased volume lowers demand, and lower demand is caused by lower marginal utility. This relationship also suggests that the higher the marginal utility, the more elastic a good is.

The law of demand states that quantity is inversely related to price. That means that as price goes down, demand goes up, while an increase in price decreases demand. The degree of elasticity is represented by the ratio of "percent change in quantity" and "percent change in price." In other words, a product is considered highly elastic if a small change in price creates a large change in demand and vice-versa.

Elasticity is a way of quantifying what will happen if you raise prices. You want to know if your customer will continue to buy your product at the same level of demand or stop buying the product. Maybe your product has a large number of substitutes and a small price increase creates a huge change in demand because people can easily switch to a different brand. Perhaps it takes a dramatic change in price to create a huge change in demand. The former is an example of an elastic good, the latter is an example of an inelastic good.

Marginal is another word for incremental. It is the measure of incremental change in demand from a change in price. Utility refers to the satisfaction of your customer. If your customer does not like the product it has no utility. Likewise, if your customer likes the product, it has utility. Marginal utility refers to the incremental increase in customer satisfaction by purchasing another unit of the same product.

It is the lack of incremental satisfaction in the product that lowers demand. In the same way that a product with lots of substitutes is elastic, the product with lots of substitutes for the same level of satisfaction is also elastic. In general, the less satisfaction a good can produce with each purchase, the more it will be affected by small changes in demand because the customer can obtain greater satisfaction elsewhere.