How does the law of diminishing marginal utility relate to the demand curve?

1 Answer
Oct 31, 2015

Law of Diminishing Marginal utility is the basis of Law of Demand.


Law of Diminishing Marginal utility says that as the consumer consumes additional units of the same good, he gets less and less utility from the successive units. The Consumer to be in equilibrium, he he has to equate MU with Price.

To begin with, assume the consumer is in equilibrium (#MU=P#)

When the price of the good falls, the consumer's equilibrium is disturbed (#MU>P#) .

To reestablish equilibrium, he has to reduce the #MU#. That is possible only when he consumes more.

It is this tendency which makes the consumer to buy more of a good when the price of it falls

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