Question

Demand curves slope downward because, other things held equal, a. An increase in a product's price lowers MU. b. A decrease in a product's price lowers MU. c. A decrease in a product's price raises \(M U\) per dollar and makes consumers wish to purchase more units. d. An increase in a product's price raises \(M U\) per dollar and makes consumers wish to purchase more units.

Short answer

c. A decrease in a product's price raises MU per dollar and makes consumers wish to purchase more units.

Step-by-step solution

Understanding the Demand Curve

The demand curve slopes downward, which indicates that as the price of a product decreases, the quantity demanded increases. This concept reflects the law of demand, which states there is an inverse relationship between price and quantity demanded.

Considering Marginal Utility

Marginal utility (MU) refers to the additional satisfaction gained from consuming one more unit of a product. When a product's price decreases, the utility per dollar spent increases, making the product more attractive to consumers.

Analyzing the Relationship

A decrease in a product's price increases the marginal utility per dollar (MU per dollar), as consumers can get more satisfaction for the same amount of money. This incentivizes consumers to purchase more, causing the demand curve to slope downward.

Evaluating the Options

The correct option describes this relationship: A decrease in a product's price raises MU per dollar and makes consumers wish to purchase more units. This explains the downward slope of the demand curve due to consumer behavior in response to price changes.

Key concepts

The Law of Demand

The law of demand is a fundamental principle in economics stating that, all else being equal, as the price of a product falls, the quantity demanded of that product increases, and vice versa. This principle is visually represented by a downward-sloping demand curve.

This happens because consumers are naturally drawn to lower prices, allowing them to afford more of the product than before. Lower prices also free up income that can be spent on additional units or other needs, thereby boosting consumption.

• Price decrease = Higher quantity demanded
• Price increase = Lower quantity demanded

This inverse relationship is crucial for understanding consumer behavior in the marketplace. It's important to note that the law of demand holds true as long as other factors, such as consumer preferences or income levels, remain constant. When these "other factors" are not constant, the law of demand might not apply.

Understanding Marginal Utility

Marginal utility describes the additional satisfaction or value a consumer receives from consuming one more unit of a good or service. Each additional unit of a product consumed offers different levels of satisfaction.

Usually, the first few units provide significant satisfaction, but after a certain point, each additional unit provides less satisfaction. This is called diminishing marginal utility.

When the price of a good decreases, it affects the marginal utility per dollar spent. Consumers perceive that they get more satisfaction for their money, making the product more desirable.

• Price drop = More utility per dollar
• Price rise = Less utility per dollar

This is why, as prices fall, people tend to buy more. They are effectively receiving greater enjoyment or satisfaction for each dollar spent.

The Inverse Relationship

The demand curve demonstrates an inverse relationship between the price of a product and the quantity of it demanded by consumers. In other words, when one variable increases, the other decreases.

This inverse relationship is central to the concept of demand in economics. As the price goes down, consumers are incentivized to buy more of a product, simply because they can afford more of it, and they perceive better value in their purchase.

• Lower prices make products more appealing and accessible.
• Higher prices cause consumers to cut back on purchases.

It's a delicate balance, and understanding this can help businesses set prices strategically to maximize sales and manage supply effectively. This relationship is evident across various markets and helps explain consumer purchasing patterns in the real world.