We give here a demand curve of an imaginary consumer. The demand curve simply hows ho the quantity purchased varies with the variation in price. Along OX are represented the quantities of the good purchased and along OY the prices. It be seen that at the price OP, OM quantity i purchased. a 01″ the quantity purchased i. 0 and at 01″ price . As the price falls. more is purchased. and vice or less urgent uses when it becomes cheaper. For example, if water is dear, we shall use it for drinking only; but when it becomes cheaper, we shall use it for washing and other less urgent uses. Thus, the old buyers buy more and some new buyers enter the market. The cumulative effect is an extension of demand when price falls. But let us go a bit deeper and try to find out why the demand increases when the price ralls, other things being equal. Benham” has answered this question in this manner: Having a limited amount of money at his disposal, every consumer wants to get the maximum satisfaction therefrom. Knowing his own scale of preferences he will according to the law of substitution and equi-marginal returns, so arrange his expenditure that he gets equal marginal utility from the last paisa that he spends in different ways. He will keep to this arrangement if the prices remain the same. But if the price of a commodity, included in
his assortment of goods and services falls then he must make a corresponding alteration in his scheme
of expenditure. By the fall in price, divergence has been created between the marginal utility’ and price and this must be rectified. This can be done by buying more of the commodity when its price falls thus bringing its marginal utility to the level of the price. That is why, people buy more when the prices fall. Conversely, we buy less, when the price rises because: (a) we substitute other cheaper things for it; and (b) when price rises, we feel poorer (our real income falls), hence we economies and cut down our consumption. The law of diminishing marginal utility too is the basis of the law of demand. The consumer will uy more only if the price falls because more he buys the lower is the marginal utility.
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