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Wednesday, 22 September 2021

Once more, "The law of demand, but why?"

   I have recently read a textbook for Edexcel AS/A Level economics, the exam supposedly to be taken by UK students or other international students following UK syllabus. I wonder how it will explain the reason why demand curve is downward sloping. There is only one point offered: the law of diminishing marginal utility. I know DSE students, or most local high-school students, no longer need to learn anything about utility. I don't think it is a must to teach utility to high-school students. However, as mentioned in my earlier post, students should be told why demand curve is downward sloping. To me, using marginal utility is one way to explain the downward sloping pattern. But it has pros and cons for this method, as mentioned in another earlier post of mine. Let us see how the textbook uses marginal utility to explain the shape of the demand curve.
   The book says: "The more buyers are offered, the less value they put on the last one bought. ...This illustrates the law of diminishing marginal utility. The value, or utility, attached to consuming the last product brought falls as more units are consumed over a given period of time. ...The law of diminishing marginal utility therefore explains why the demand curve is downward sloping. The higher the quantity bought, the lower the marginal utility (the utility from the last one) derived from consuming the product. So buyers will only pay low prices for relatively high amounts purchased..."
   I appreciate the motivation that this book (or the entire AS/AL syllabus) tries to explain the law of demand to high school students. What is not ideal is that one should not confuse "value" with "utility". From the quote above, they are treated as if they are equal (see the sentence "The value, or utility"). As I mentioned in my earlier post, utility is not monetary value of a good while price is. They are of course closely related. But to close the gap between them, we need to convert "utility" into "value" by "marginal utility of money". A good generates utility. But buying one unit of this good, you need to sacrifice some money, which is the price of this good. How much you are willing to pay? Sacrificing some money, your utility is reduced because you can buy fewer other goods. Hence, if buying one extra unit of a good gives you 4 units of utility (your marginal utility of this good) but $1 gives you 2 units of utility (your marginal utility of money), then you are willing to pay $2 for one unit of this good.
   In short, diminishing marginal utility cannot be straightforwardly translated into downward sloping demand curve. In fact, I find it not easy to explain the concept of marginal utility of money to high-school students (although I have tried it above). At high-school level, I prefer the explanation using substitution effect and income effect as suggested in my earlier post.

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