Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How is utility defined in economics?

1. The quantity of a good consumed

2. The satisfaction gained from consuming goods

3. The cost associated with production

4. The total revenue from sales

The correct answer is: The satisfaction gained from consuming goods

Utility in economics is defined as the satisfaction or pleasure derived from consuming goods and services. This concept is central to understanding consumer choice, as it explains why individuals make certain purchasing decisions based on perceived satisfaction. Utility is subjective, meaning it varies from person to person; what brings satisfaction to one individual may not have the same effect on another. In the context of economic theory, utility helps to explain demand, as consumers will typically seek to maximize their utility within their budget constraints. This insight is crucial for many economic models, including those examining consumer behavior and market dynamics. The other options, while related to economic concepts, do not accurately capture the essence of utility: the quantity of a good consumed speaks to consumption levels rather than satisfaction, cost associated with production pertains to the supply side of economics, and total revenue from sales relates to business income rather than consumer satisfaction. Understanding utility provides a strong foundation for analyzing markets and consumer preferences.