RELATIONSHIP BETWEEN LAW OF DIMINISHING MARGINAL UTILITY AND NORMAL DEMAND CURVE

RELATIONSHIP BETWEEN LAW OF DIMINISHING MARGINAL UTILITY AND NORMAL DEMAND CURVE

The concept of the law of diminishing marginal utility can be used to explain the slope o normal demand curve.

The higher the marginal utility derived from the good, the h: consumers are willing to pay for it.

The rational consumer aims at maximising utility from the use of his resources. To achieve this, the con ensures that marginal utility (MU) of a g equal to the price (P) of the good.

However, MU diminishes as increasing quantities of a good are consumed. Therefore, MU of a good diminishes, consumer’s willingness to pay diminishes. This inverse relationship between quantity demanded of a good and its price is referred to as the law of demand.

Both the MU and demand curve slope wards from left to right. From the diagram , 21.6, the higher the MU derived from a commodity, the higher the price the consumer be willing to pay for it, hence when MU is high (e.G MU3 at q3), a consumer will be ready to pay P3 for q3.

However, when MU diminishes as increasing quantities are consumed (e.g from q3 to 12), willingness to pay diminishes (e.g from P2 to P1). This inverse relationship between MU and quantities consumed is referred to as law of diminishing marginal utility.

A reduction in price will encourage a consumer to consume a commodity whose marginal utility has fallen, hence marginal utility of a commodity must be equal to the price of the commodity (MUx = Px).

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