Equilibrium and the Law of Demand

# Equilibrium and the Law of Demand - units since Mu 2 = 30 =...

This preview shows page 1. Sign up to view the full content.

Equilibrium and the Law of Demand: Once the law of marginal utility is granted, both, the equilibrium of a consumer and the law of demand follow automatically. The equilibrium rule is that the consumer must equate marginal utility with market price of a good in order to maximize his satisfaction. Mu = Price for Maximum satisfaction If the price of a good (consider a chocolate ), is 40 cents per unit then the consumer can buy one unit since, Mu 1 = 40 = price When the market price is 30, he can buy 2 units and, at market price 18, he can buy 3
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: units since, Mu 2 = 30 = price Or, Mu 3 = 18 = price Variations in the number of units consumed at varying prices help to establish the law of demand. As the price of a good falls from 40c to 2c the demand for that good rises from 1 to 5. On the other hand, as the price of a good rises from 1c through 20c the demand for that good goes on falling from 5 through 1. Therefore the inverse relationship between price and quantity of a good demanded at once follows, once the DMU principle is accepted and applied....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online