What is Demand? | What is Demand Curve? | What is Law of Demand? | What is Law of Diminishing Marginal Utility? | Why Demand Curve is downward sloping? | Relation between Demand Curve and Law of Diminishing Marginal Utility
Introduction
In previous session we discussed the Cardinal Utility
Analysis approach to study the consumer behavior. We saw that under Cardinal Utility
Analysis, it is assumed that the utility can be measured in numbers. And to
measure the same, we have two classifications based on the concept of utility
which are Total Utility and Marginal Utility. Total Utility is the total
satisfaction derived from a fixed quantity of particular commodity or product.
And when we add one more additional unit of the same commodity or product to
the previous amount of quantity for consumption, the utility derived from that
additional unit of product or commodity added is termed as Marginal Utility.
Then we also discussed the relation between the Total
Utility and Marginal Utility. The relationship between Total Utility and
Marginal Utility can be explained with the following formulations;
MU (n) = TU (n) – TU (n-1)
And another way to look at it is, if you break down the
Total Utility, we find that the Total Utility is built up Marginal Utility of
each unit.
In formula form;
TU (n) = MU (1) + MU (2) + … + MU (n)
So total utility of a fixed quantity of a particular product
is the sum of marginal utility of each individual quantity of that particular
product.
Finally, we discussed the Law of Diminishing Marginal
Utility, where we saw the changes that take place when we keep on adding the
additional unit of a particular product for consumption and we find that each additional
unit gives lesser utility to the consumer and then comes a time where the
additional unit gives additional utility equal to zero that is to say no
utility is derived from that product. That is the point where the Total Utility
remains constant even after the addition of that one extra unit and at that
point only the Marginal Utility becomes zero. Then moving forward, if we keep adding
one more unit, it starts decreasing the total utility of the product as the
Marginal utility or additional utility derived from the additional unit becomes
negative. This phenomenon is termed as Law of Diminishing Marginal Utility.
Now in this session we will try to establish the
relationship between Cardinal Utility Analysis, Demand & Demand Curve and
Law of Diminishing Marginal Utility.
Demand & Demand Curve | Law of Demand
What is Demand?
Demand for a commodity is the quantity of that particular good
or commodity that a consumer is willing to buy and is able to afford the same,
for a given level of consumer’s income and price of that good or commodity.
Demand for a commodity depends multiple factors other than
of course of price of the commodity, such as prices of other commodities that
is the substitutes or its complements, the level of income of consumer and even
on taste and preference of the consume. But that will discuss in detail going
forward in upcoming sessions.
What is Law of Demand?
In general, holding the other factors constant, there is a
negative relationship between demand for a particular commodity and its price.
This relationship is known as the Law of Demand, which we will discuss in upcoming
session in detail.
So it simply means that given other factors as mentioned
above constant, at lower prices the consumer will demand more of a commodity
and at higher prices, consumer will demand less of that product.
What is Demand Curve?
The graphical representation of different quantities of a particular
commodity demanded by a consumer at different prices of that same commodity,
given the other factors that affect the demand constant, is known as the Demand
Curve.
Let us take an example to understand the same.
|
Quantity Demanded |
Price |
|
80 |
0 |
|
50 |
1 |
|
30 |
2 |
|
20 |
3 |
|
13 |
4 |
|
7 |
5 |
|
3 |
6 |
|
0 |
7 |
We can clearly see from the graphical representation, that
the as the price of the commodity decreases, the quantity demanded by the
consumer for that product increases and at higher prices of the product
consumer are willing to buy less of that commodity which makes the demand curve
downward sloping. This depicts that there is a negative relationship between
the price of a particular commodity and the quantity demanded which we refer to
as Law of Demand.
Why Demand Curve is downward sloping? | Relation between Demand Curve and Law of Diminishing Marginal Utility
The Demand curve for a commodity is downward sloping. But
why? This justification of this phenomenon can be derived from the Law of
Diminishing Marginal Utility. The Law of Diminishing Marginal Utility states
that each additional unit of a particular commodity gives lesser marginal
utility. Which means each additional unit consumed gives lesser satisfaction to
the consumer. Hence consumer will not be willing to pay the same amount as paid
for previous unit, for an additional unit which is going to provide lesser
satisfaction. This results in a downward sloping Demand Curve.
At price Rs.2 the consumer is willing to buy 30 quantities.
Now from this point onwards, the consumer will demand additional quantity only
when the price drops to Rs.1 as for the consumer the utility that can be
derived from those additional 20 quantities less than Rs.2 or to say equivalent
to Rs.1.
Thus Law of Diminishing Marginal Utility explains the
downward sloping Demand Curve or negative slope of the Demand Curve.
Conclusion
In this session, we discussed about Demand as well as Demand
Curve. We also leant about the Law of Demand which denotes that there is a
negative relationship between price of a commodity and quantity demanded of
that commodity. And then we dwell on to find, why the demand curve is downward
sloping or negative that is why there is negative relation between the price of
commodity and quantity demanded of that commodity. We found that the negative
slope of the Demand Curve sources its rational from the Law of Diminishing
Marginal Utility. Because the consumers derive lesser marginal utility from
consuming an additional unit of a commodity, they are willing to pay less for
purchasing additional units and this results in negative or downward slope of
the Demand Curve.
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