Demand Curve and Law of Diminishing Marginal Utility

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.