Question

Explain, in your own words, each of the three reasons why the Aggregate Demand curve (AD) is negatively sloped. Be sure to use the determinants of in your explanation. Please explain thoroughly. The answer needs to be at least 200 words.

Answer 1

Three reasons why the demand curve slopes downwards are:

Real balance effect, Diminishing marginal utility effect and Substitution effect.

Real Balance effect: As the price of any good increase people buying those goods feel poorer with every extra good they purchase. People have a fixed income with them to spend at a higher price the demand for that good decrease because the real balance left with the person buying it is reduced, decreasing the amount of product bought by them.

Diminishing marginal utility effect: People buy products as long as it satisfies their need. At a higher price the marginal utility a consumer is getting from that good decreases limiting the number of good the person will buy at a higher price. As the price decrease, the utility of that good increases and people buy them more.

Substitution effect: There are many different substitutes of a good in the market. As the price of a good increases the consumer shift to the substitute good decreasing the demand of that good and vice versa because of which the demand for that good increase at a lower price. Making the demand curve downward sloping.