Thus the numerator of the elasticity formula is smaller than the denominator. It is elastic. A decline in price will cause consumers to by a larger amount of the good because the reduction of utility is so small. We will now explain the law of demand in more detail using the concept of diminishing marginal utility. We will use the law of diminishing marginal utility to explain how the consumer allocates their money income among all the goods and services they buy.
Consumers also have a budget restraint .
That is they have a limited amount of income. Remember limited income can be a large amount but it is still limited. This is accomplished by the utility maximization rule. Suppose there are only two goods, food and clothing. A consumer will maximize their utility subject to the budget constraint when the following condition occurs.