Question

The demand curve is downward sloping because of the law of a. diminishing marginal utility. b. diminishing consumer equilibrium. c. consumer equilibrium. d. diminishing utility maximization.

Short answer

The correct answer is (a) - the demand curve is downward sloping because of the law of diminishing marginal utility. This law states that as a consumer consumes more of a good, the additional satisfaction (marginal utility) they derive from consuming an additional unit of the good decreases, which results in a downward sloping demand curve.

Step-by-step solution

Understand the concept of the demand curve

The demand curve is a graphical representation of the relationship between the quantity of a good demanded by consumers and its price. It usually slopes downward, which means that as the price of the good increases, the quantity demanded by consumers decreases, and vice versa.

Evaluate option a

Option (a) states that the demand curve is downward sloping because of the law of diminishing marginal utility. The law of diminishing marginal utility states that as a consumer consumes more of a good, the additional satisfaction (marginal utility) they derive from consuming an additional unit of the good decreases. This implies that consumers are willing to pay less for additional units of a good, which can help explain the downward sloping demand curve.

Evaluate option b

Option (b) mentions the law of diminishing consumer equilibrium. However, there is no such law in economics. Consumer equilibrium is a condition where a consumer allocates their spending in a way that they maximize their satisfaction or utility.

Evaluate option c

Option (c) refers to consumer equilibrium, as mentioned in step 3. Although consumer equilibrium is related to the overall allocation of a consumer's spending, it does not directly explain why the demand curve is downward sloping.

Evaluate option d

Option (d) talks about diminishing utility maximization, which is not an established concept in economics. The closest concept to this would be 'utility maximization,' where a consumer tries to maximize their satisfaction from consuming goods and services. However, utility maximization does not directly explain why the demand curve is downward sloping.

Identify the correct answer

Based on our evaluation of each option, we can conclude that the correct answer is option (a) - the demand curve is downward sloping because of the law of diminishing marginal utility.

Key concepts

Diminishing Marginal Utility

The term diminishing marginal utility describes a fundamental principle in economics. It highlights that as you consume more of a particular product, the additional satisfaction or benefit ( marginal utility) from each new unit decreases. Imagine eating slices of pizza. The first slice might bring great joy, but by the fourth or fifth slice, you may not enjoy it as much.
This concept is pivotal in explaining consumer behavior and market demand. When people start valuing additional units of a product less, they are less willing to pay for those extra units. Hence, when the price of the product rises, the quantity demanded drops. Therefore, the demand curve generally slopes downwards, reflecting this decreased desire for more when prices rise.
In essence, diminishing marginal utility helps explain why consumers stand firm on prices and why merchants might lower prices to increase sales volume.

Consumer Equilibrium

Consumer equilibrium illustrates how individuals decide to spend their resources such as money to maximize their utility or satisfaction. It's the optimal point where consumers distribute their income across different goods and services in a way that stretches their satisfaction to the furthest extent possible.
To reach consumer equilibrium, a consumer must assess the marginal utility per unit of currency spent for each involved good.

• If the utility per currency unit is higher for one product than another, the consumer will likely spend more on the first product.
• However, the goal is to achieve a balance where the satisfaction per currency unit is equal across all products.

This situation aligns with the concept of utility maximization. Even though consumer equilibrium does not directly explain the shape of the demand curve, it remains crucial in understanding how consumers balance spending to maximize happiness.

Utility Maximization

Utility maximization is the goal that every consumer has when spending their money to gain the maximum satisfaction possible from the combination of goods and services they purchase.
The idea is to get the most out of the limited resources available. To achieve this, consumers decide their spending by comparing the marginal utility of goods relative to their cost. In other words, they try to get the highest satisfaction for each unit of money spent. While this doesn’t specifically dictate the slope of the demand curve, it does give insights into consumer spending patterns and behavioral economics.
Achieving utility maximization requires the consumer to evaluate and adjust their choices until they reach the best possible combination to achieve optimal satisfaction. This pursuit drives the dynamic and strategic nature of consumer decision-making in the market.