Question

Show that there is an inverse relation between price of a commodity and its quantity demanded. Use Utility Analysis.

Answer 1

A consumer chooses the quantity at which marginal utility equals price. When price falls, marginal utility initially exceeds price, so the consumer buys additional units. As consumption increases, marginal utility diminishes; the consumer continues buying until marginal utility again equals price. Thus, a lower price leads to a greater quantity demanded, while a higher price leads to a smaller quantity demanded.