# Marginal Utility Theory Underlies The Law Of Demand Analysis

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1) Explain Total Utility and Marginal Utility and the relationship between them. Total Utility is the amount of utility one receives from all the goods one receives. The Marginal Utility is utility one receives when one receives another good. When Total Utility is at its maximum Marginal Utility is at zero because there is not any extra utility to receive. Total utility increases at a decreasing rate until it reaches its maximum point, then it decreases at a decreasing rate, while Marginal Utility decreases at a constant rate. The Marginal Utility curve can be negative when the Total Utility curve is decreasing.

2) Define and explain Consumer Optimum. Consumer Optimum shows a solution to a problem that all people have. Allowing consumers
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Marginal Utility underlies the Law of Demand because it includes the additional utility that can be received by a consumer. Consumers want to receive the maximum utility of a product and this creates the Law of Demand.

4) Define and explain Elasticity. Be sure to explain any terms. Elasticity is how economists measure a good’s sensitivity to a change in price or quantity. It answers the question of “does the price of this product affect its demand?” Luxuries tend to be elastic while necessities are inelastic for example, a change in price of pepper will not affect the demand of pepper because it is a necessity, while a change in price of movie tickets will affect the demand because many consumers are not willing pay more for the tickets, they are a luxury.

5) Describe and explain the Determinants of Elasticity. There are several Determinants of Elasticity. The first is substitutability, how many substitutes there are and how similar they are to the good. The more substitutes there are and the more similar they are to the good the easier it will be for the more elastic it will be because consumers will be more likely to buy the substitute if the price goes
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The consumer is less likely to buy the luxury unnecessary good if the price goes up making it more elastic, while the consumer will buy the necessity no matter the price. Take pepper for example, no matter the price of pepper consumers will continue to buy it, making it a very inelastic product. Time is another Determinant of Elasticity because the longer a good is supposed to last the more the consumer is willing to pay. For example, the demand for cars tends to be more elastic because people will replace them over time.

6) Compare, contrast and explain economic profit and accounting profit. Be sure to explain any terms. Economic profit and accounting profit both calculate gains and losses of production. Accounting profit calculates total revenue subtracting explicit costs. Explicit costs are the physical costs of production such as capital spent in production. Economic profit also calculates total revenue, but also subtracts implicit costs, which are the opportunity costs of production. One uses Economic profit to calculate the total value of a company, because it includes buildings, equipment, and other things not included in explicit costs.

7) Describe and explain the Production Function. The Production Function compares physical inputs and physical outputs of

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