Our desires for goods and services originate in the structure of personality and social dynamics and are not explained by economic theory. Economic theory focuses on demand—that is, our ability and willingness to buy specific quantities of a good at various prices.
Utility refers to the satisfaction we get from consumer goods and services. Total utility refers to the amount of satisfaction associated with all consumption of a product. Marginal utility refers to the satisfaction obtained from the last unit of a product.
The law of diminishing marginal utility says that the more of a product we consume, the smaller the increments of pleasure we get from each additional unit. This is the foundation for the law of demand.
The price elasticity of demand (E) is a numerical measure of consumer response to a change in price (ceteris paribus). It equals the percentage change in quantity demanded divided by the percentage change in price.
If demand is elastic (E > 1), a small change in price induces a large change in quantity demanded. "Elastic" demand indicates that consumer behavior is very responsive to price changes.
If demand is elastic, a price increase will reduce total revenue. Price and total revenue move in the same direction only if demand is inelastic.
The shape and position of any particular demand curve depend on a consumer's income, tastes, expectations, and the price and availability of other goods. Should any of these things change, the assumption of ceteris paribus will no longer hold, and the demand curve will shift.
Advertising seeks to change consumer tastes and thus the willingness to buy. If tastes do change, the demand curve will shift.
