Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the definition of Utility in economics?

1. The pleasure or satisfaction gained from the consumption of goods

2. The cost associated with producing additional units of goods

3. The total revenue generated from sales of goods

4. The market value of a good or service

The correct answer is: The pleasure or satisfaction gained from the consumption of goods

Utility in economics refers to the pleasure or satisfaction that consumers derive from the consumption of goods and services. This concept is central to consumer choice theory, as it helps explain how individuals make decisions based on their preferences and the satisfaction they anticipate from various options. When individuals purchase goods, they are motivated by the expected utility those goods will provide. The higher the utility derived from a product, the more likely that consumer is to buy it, and the corresponding price they are willing to pay is influenced by the utility it brings. This notion of utility is foundational in understanding demand, as it explains why people prioritize their consumption choices based on the happiness or satisfaction they expect. In contrast, the other choices focus on different economic concepts. The cost associated with producing additional units relates to marginal cost, total revenue pertains to the overall income generated from sales, and market value reflects the price determined by supply and demand dynamics. While these concepts are important in economics, they do not encapsulate the personal satisfaction or enjoyment derived from consumption, which is precisely what utility represents.