Problem 22 Use the law of diminishing margi... [FREE SOLUTION]

Chapter 3: Problem 22

Use the law of diminishing marginal utility to explain why demand curves slope downward.

Short Answer

Expert verified

The Law of Diminishing Marginal Utility causes the demand curve to slope downward because it reflects that consumers derive less utility from each additional unit consumed, and will only purchase more units if the price decreases.

Step by step solution

Understand the Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility holds that when a person consumes more of a given product while holding other variables constant, the additional satisfaction, or utility, gained from each extra unit of that product decreases. This is due to the fact that the consumer derives less utility or satisfaction with each additional unit of consumption, leading to a surplus of the product.

Mapping the Law onto the Demand Curve

The demand curve is a graphical representation of the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at any given price. Here's where the law of diminishing marginal utility comes into focus. As the consumer consumes more units, the utility derived from each additional unit drops. Subsequently, consumers are only willing to purchase additional units at a lower price which leads to a downward slope on the demand curve.

Relating the Law to Consumer Behavior

The law helps to explain why the demand curve slopes downward. When the price of a good decreases, the cost of acquiring each additional unit also decreases. Consumers, aiming to maximise their utility, will therefore decide to purchase more of the product. As the utility they derive from each additional unit falls, they will only continue purchasing more if the price continues to decrease, hence the downward slope.