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Chapter 4: Problem 6

What does the law of diminishing marginal utility have to do with the law of demand?

Short Answer

Expert verified
The law of diminishing marginal utility has to do with the law of demand in that it supports it; as the satisfaction derived from each additional unit of a product decreases (diminishing marginal utility), a consumer would only be willing to purchase more of this product if its price is reduced, which corresponds to the law of demand - as the price of a product falls, the quantity demanded increases.

Step by step solution

01

Understanding the law of diminishing marginal utility

The law of diminishing marginal utility proposes that as more units of a good or service are consumed, the additional satisfaction from each subsequent unit decreases. It is grounded in the basic human tendency where the first unit of consumption of a good or a service yields more utility (satisfaction), compared to the second and subsequent units, with a constant consumption of other goods and services.
02

Understanding the law of demand

The law of demand is an economic principle that represents an inverse relationship between the price of a commodity and the quantity demanded. That is, when the price of a commodity rises, the quantity demanded falls, provided other things remain constant (ceteris paribus). Similarly, when the price of a commodity falls, the quantity demanded rises.
03

Analyzing the interrelation of the two laws

The law of diminishing marginal utility supports the law of demand. As a consumer consumes more variable units of a commodity, its marginal utility starts decreasing. Therefore, the consumer would only be willing to buy additional units of the good if its price is reduced, which is in line with the law of demand. Hence, the law of diminishing marginal utility can explain the downward sloping demand curve in economics.

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