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Economics explained


Behavioral economics

Deriving Demand Curves from marginal utility curves

Deriving Demand Curves from marginal utility curves

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Individual people’s demand curve for any good will be the same as their marginal utility curve for that good, where utility is measured in money.

The marginal utility curve is negatively sloped.

It shows that as the consumer acquires larger quantities of pizza, its marginal utility diminishes. Consequently, at a diminishing price, the quantity demanded of pizza increases. There is clearly a relationship between the marginal utility curve and the consumer demand curve.

This is demonstrated in the figures below which shows the marginal utility curve for a particular person and pizzas eaten.

If the price of a pizza were $8, the person would consume 1 pizza, where MU = 8 utils.

If the price of a pizza fell to $6, consumption would rise to 2 pizzas, since this is where MU = 6 utils.

Thus as long as individuals seek to maximise consumer surplus and hence consume where the price = the marginal utility, their demand curve will be along the same line as their marginal utility curve

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