Demand curve from the law of diminishing marginal utility:
The law of diminishing marginal utility states that the marginal utility of a good (expressed in terms of money) to a consumer decreases as the quantity consumed increases. This means that marginal utility curve of a good is a downward sloping curve i.e. there is a negative relationship between units of goods consumed and the marginal utilities of those goods. Marshallian utility analysis describes the fact that in case of acquiring consumer’s equilibrium when marginal utility of money remains constant, the marginal utility and price of a good is equal to each other. As there is a negative relationship between units of good and its utility and as marginal utility and price is equal so we can say that there is a negative relationship between units of good and price too. Demand law also utters the fact that there is a negative relationship between price and quantity demanded of a good. Hence, the law of diminishing marginal utility and the law of demand are closely related. Marginal utility curve is down warded from left to right and the demand curve is same too.
The following figure better describes the fact:
In the upper portion,
OX axis represents units of goods
OY axis represents (price of good x marginal utility of money)
Though marginal utility of money remains constant, price varies. OY axis also measures the marginal utility of good too. In case of, consumer buys OM1 units of good. As at OM1, the marginal utility of the good that is derived from the consumption of OM1 unit (expressed as AM1 in the figure) and are equal to each other. Now, if price falls to P2, the units of good purchased requires to be increased to OM2 in order to maintain equilibrium position. As a result, marginal utility becomes to BM2 which is equal to
. So when, the price decreases the marginal of good is also decreased through increasing the quantity purchased. So when price decreases, quantity demanded increases. This statement is related with demand law and it has been shown in the lower portion of the figure. The lower portion describes that at price P1, quantity demanded Qd is OM1 which has been expressed through point A. At point B, Qd is OM2 while price is P2. If we connect A and B with a curve, we get a down ward sloping demand curve DD which is similar to MUx1 as shown in the upper position. As MUx1 is down warded because of the law of diminishing marginal utility.
Thus, a demanded curve is derived from the law of diminishing marginal utility.
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