Derivation of demand curve from law of diminishing marginal utility

The downward sloping demand curve which represents inverse association between price and quantity demand can be derived with the help of law of diminishing marginal utility. The MU curve implies that as unit consumption of X goes on rising, the MU from X goes on diminishing. Every point on the MU curve represents consumers equilibrium where MUx=Px. The changing MUx and Px brings consumer into equilibrium in each point of the MUx cuve.

     The following figure demonstrates the derivation of downward slopping demand curve with the help of principle of diminishing marginal utility. The figure has two parts. Upper panel represents derivation of MU curve and lower panel the derivation of demand curve.

This figure has two parts. Part A represents diminishing marginal utility and part B represents demand curve. Initially when a consumer consumes OX1 unit of commodity he derives OMU3 marginal utility at OP3 unit of price. Now when the price falls to OP2 MU is greater than price so to make equilibrium MU should be reduced. Consumer should increase the consumption of X. when he reaches OX2 he obtains the equilibrium at OMU2=OP2. When price falls to OP1 the MUX is less than price, so to make equilibrium MU should be increased and this can be done only when the quantity demanded is increased. When the consumption is increased at OX3 he attains the equilibrium at OMU1=OP1.

    In this way the demand curve can be explained with the help of diminishing marginal utility curve.