Question

Explain the three characteristics of demand curve and the law of diminishing marginal utility. Illustrate with a demand graph.

Answer 1

Demand curve represents the set of combinations or menu of quantities at given prices.

Q = f(p)

The three characteristics of the demand curve:

1. Downward Sloping - As prices increases, demand decreases or price decreases, demand increases keeping other things constant. This is also known as the Law of Demand that states there is a negative relationship between demand and price. As prices increase from p to p1 then quantity decreases from q to q1 and similarly, As prices decrease from p to p2 then quantity increases from q to q2.

2. Movement along the curve - Keeping other things constant, as price increases or decreases the movement is along the curve as explained above.

3. A shift to left or right - Keeping other things constant, as one factor other than prices changes there will be a shift in the demand curve. Suppose there is an increase in income keeping other things constant, there is a shift in demand curve towards the right.

Law of diminishing marginal utility :

Total utility - The total utility derived from the total amount of good consumed.

Marginal Utility - The change in utility derived from consuming one additional unit of a good.

Units of good	Total Utility	Marginal Utility
1	15
2	25	10
3	30	5
4	32	2
5	30	-2

Fro graph above you can observe that when the total utility is at highest, marginal utility is zero. In addition to it, as consumption of good increases the marginal utility decreases from 10 to 5, 5 to 2 and so on. This is known as the law of diminishing marginal utility. It states that as consumption of good increases, marginal utility starts decreasing while keeping other things constant.