I'm revisiting some old topics from introductory economics and I am not quite sure I have convinced myself of the theory behind marginal utility. I have a few simple questions if anyone could please help me with.

On a demand curve, if we move from point 1 to point 2:enter image description here

the increase in demand is due to two classes of buyers:

  1. Buyers who would've bought at a higher price but are now buying even more at a lower price (marginal utility of second quantity now greater than new price at P2)

  2. Buyers who were not buying at all at the previous price and are now buying (marginal utility of first quantity now greater than new price at P2)

In general, is the increase in demand attributed more to buyers of class 1 or class 2? Intuitively, I always thought it would be class 2. In my personal experience, decisions for buying or not buying tend to be more binary in an all or nothing fashion so the marginal utility theory applied to class 1 has not held as strongly as it has in class 2.

If theres no simple answer, is there a topic I should look into to get a better understanding?

  • $\begingroup$ What exactly do you mean by the "marginal utility theory"? In general, there is no hard and fast rules to determine whether class 1 or class 2 buyers contribute more to the increase in quantity demanded due to a price drop. It depends on the magnitude of the drop, the slope of each class's marginal utility, and so on. $\endgroup$
    – Herr K.
    Feb 18 '21 at 19:42

That's an entertainingly specific question to ask! I don't know the answer, but my thoughts are this.

You're looking at an aggregate demand curve, which is a result of all the demand curves of individuals in this economy. Now, individual demand curves are fairly easy to understand. Each individual takes prices to be fixed, and then they maximise utility. When the price changes, for instance because the economy moves from point P1 to point P2, everyone adjusts their consumption behaviour. How much they'll change their consumption is then a question of their utility functions, and hence is specific to the product and to the economy.

So, this is my answer: I think either could be true, it just depends on the product, prices, and utility functions.


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