The definition of the term “demand” in economics is the desire of a consumer to purchase a commodity, backed by his/her ability to purchase it. The fine line of demarcation between a want and a demand is the consumer’s purchasing power. Utility, on the other hand, is defined as the unit of measurement of the “usefulness”, a consumer obtains from consuming one unit of the commodity. The relationship between demand and utility, has never been clearly expressed by economists, in a generalized point of view till date. However, the demand-utility curve can be plotted on considering the parameter of “Marginal Utility”. Marginal utility is the differential increase or decrease in the utility derived by the consumer, on consumption of an additional unit of the same commodity.
Demand Utility Curve
On plotting a demand-marginal utility curve, one can see the linearly decreasing slope, thus indicating the decreasing utility on increased consumption (contrary to the classical demand-utility curve). This phenomenon was explained by Professor Carl Menger (1840-1921), on the basis of statistical analysis and calculations, formulated in form of a Law, known as the “Law of Diminishing Marginal Utility”. The Law states that all else equal as consumption increases the marginal utility derived from each additional unit declines, thereby showing an inverse relationship between the quantity demanded and the utility. A practical example to demonstrate the Law, may be as follows. Suppose a hungry man has hundred rupees with him to buy food, and he chooses to purchases five twenty rupees burgers. Therefore, on consumption of the first burger, the hunger is maximum, and therefore the maximum utility is derived from it. However, on consumption of the second burger, the intensity of hunger is a little low, and thereby the utility is also low. Similarly, during the consumption of the third burger, the man is not hungry, but wants to fill his appetite, thereby further decreasing the utility. Therefore, we can see a progressive decrease in the derived utility. Conversely, after consuming the fourth burger, the man’s appetite is filled and thereby utility becomes zero. But if, he decides to also consume the fifth burger, he derives no positive utility from it, but instead obtains negative utility. This proves the diminishing nature of marginal utility.
However, we must also acknowledge the criterion the act must fulfill, for it to obey the Law. Certain assumptions, include the fixed price of the product, non-durability of the goods, no change in the consume income and the complete sanity of the consumer. Considering these, there exists some exceptions to the Law which can be stated as follows. Firstly, the law holds true for homogenous units only. Secondly, the law is applicable for a reasonable quantity of commodities (e.g. one cannot obtain the same utility from two units of different quantity). Thirdly, the law holds true only when the entire act of consumption takes place in a short time-span (i.e. the gap between consumption of two units must be small). Finally, the law does not hold true for scarce commodities (i.e. rare coins, stamps etc.) as their utility is ever-increasing.