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Question
Show that demand of a commodity is inversely related to its price. Explain with the help of utility analysis.
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Solution
Suppose a consumer consumes a good X and its price falls. In such a case, the consumer will get a greater marginal utility by consuming good X than the other goods. Thus, he will increase the consumption of good X and its demand will increase. However, in case of the price rises, the consumer will get lower utility from the consumption of good X and thus, he will reduce the demand for it
Consider the following demand schedule for a commodity X
| Price of Commodity X (in Rs) | Quantity Demanded of X (units) |
| 10 | 100 |
| 15 | 50 |
| 20 | 25 |
| 25 | 15 |
| 30 | 5 |
A close analysis of the above schedule reveals that quantity demanded of a commodity holds a negative relationship with the price. In other words, it shows that at a higher price the quantity demanded of X falls (as the marginal utility of the consumer declines) and vice-versa. For example, as the price increases from Rs 10 to Rs 15, the quantity demanded falls from 100 units to 50 units.
Graphically, it is represented as shown below.
