Diminishing Marginal Utility

Diminishing marginal utility as well is to be held responsible for the rise in demand for a product when its price declines. When an individual purchases a product, he swaps his money revenue with product in order to increase his satisfaction. He continues to buy goods and services as long as marginal utility of money (MU_m) is lesser than marginal utility of commodity (MUC).

Given the price of a commodity, he modifies his purchase so that MUC = MU_m. This plan works well under both Marshallian assumption of constant MUmand Hicksian assumption of diminishing MUm. When price falls, (MU_m = Pc) < MUC. So, equilibrium state is upset. To get back his equilibrium state, i.e., MU_m = PC, = MUC, he purchases more quantities of the commodity. For, when supply of a commodity rises, its MU falls and once again MU_m = MUC. For this reason, demand for a product increases when its price falls