Question

Explain in a maximum of four sentences and in your own words, how Marginal utility per dollar can be used to derive a demand curve.

Answer 1

Demand curve is derived from utility curve with the help of two cases. First case is the consideration when there is only one good and second case is when there are two or more goods.

Case of One good: As consumers consumes more, their utility from consuming one more unit decline which makes the utility curve downward sloping as consumption rises from X1 to X3. This is the reason consumer tends to pay less for one more unit of the good which makes the demand curve too as well downward sloping which says when price falls from P1 to P3, quantity consumed rises from X1 to X3.

Case of Two or more goods: Consumers tends to consume goods whose utility are equal as

MUx / Px = MUy / Py = MUz / Pz ............= Income = M

Assume consumer consumes tow goods X and Y. When he consume OQ units of X and OP units of Y. Assume a case when the price of Y as well as Income remains same, the consumption of good X rises which makes the downward sloping demand curve. Initially consumer was consuming Q units, when price falls they starts consuming Q1 units.