Derive the inverse relation between price of the good and its dem… - Vidyadip

Question

Derive the inverse relation between price of the good and its demand from single commodity equilibrium condition “marginal utility = price”.

OR

Show the demand of a commodity is inversely related to its price. Explain with the help of utility analysis.

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Answer

As we know a consumer purchases a good up to the point where margnial utility of the good becomes equal to the price of that good. MU = Price

It can be explained with the help of the following figures. It can be seen from the given figures that Figure B is derived from Figure A.
In figure A, initially, consumer equilibrium is attained at point E, where let MU (10) = Price (10). Corresponding to point E, we derive point E, in figure B.

Due to fall in price (suppose from 10 to 8), MU > Price at the given quantity. So, we can say that benefit is greater than cost and the consumer increases the quantity till MU = Price condition is attained at F. Corresponding to point F, we derive the point F, in figure B. So, by joining point E, and F, together, we derive the demand curve.

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