Question

Explain the relationship between law of diminishing marginal utility and the law of demand.

Answer 1

According to the law of diminishing marginal utility, as the quantity of a good with a consumer increases marginal utility of the goods to him expressed in terms of money falls. In other words, the marginal utility curve of goods is downward sloping. Now, a consumer will go on purchasing goods until the marginal utility of the goods equals the market price.

In other words, the consumer will be in equilibrium in respect of the quantity of the goods purchased where marginal utility of the goods equals its price. His satisfaction will be maximum only when marginal utility equals price. Thus, the ‘marginal utility equal’s price is the condition of equilibrium.

When the price of a goods falls, downward sloping marginal utility curve implies that the consumers must buy more of the good so that its marginal utility falls and becomes equal to the new price. It, therefore, follows that the diminishing marginal utility curve implies the downward-sloping demand curve, that is, as the price of the goods falls, more of it will be bought.