DERIVING THE DEMAND CURVE


Consider what happens to the law of equi-marginal returns when the price of good A falls. The equality now becomes an inequality, since the consumer now receives greater utility per pound's worth of A than from good B. In order to restore the equality and to increase total utility a rational individual will consume more of good A.

As consumption increases the marginal utility derived from good A will diminish until the above equi-marginal condition has been restored and total utility is maximised. A fall in the price of good A has resulted in an increase in quantity demanded


CRITICISMS OF UTILITY THEORY


Some economists claim that utility cannot be measured objectively. There are also doubts about the assumption of rational behaviour among consumers - particularly in a world where consumers cannot expect to have all the information available on the products available in a market.


The importance of consumer feedback

In standard price theory, the preferences of consumers are taken as fixed - yet we observe that consumer's behaviour in a market is often influenced by their interaction with other consumers and this then affects demand.
A good example of this is the behaviour of consumers who attend showings of a new film at a cinema. Their reaction to a film will often determine how many other people choose to pay to watch the same film. Consumer feedback may be more significant than any amount of hype and advertising before a film is released.

Another good example is the feedback of consumers who visit a local restaurant or feedback from people who have stayed at a particular holiday resort. Their experiences may exert a significant influence on the preferences and choices of other consumers. It is little wonder that many successful firms trace some of their success at their willingness and ability to respond pro-actively to consumer feedback.

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