Question

Explain why demand curve are downward sloping

Answer 1

Demand curve slopes downward due to the following reasons:

1) Law of Diminishing Marginal Utility- The law of Diminishing Marginal Utility states that if an individual has an extra unit of a commodity, the marginal utility derived from the consumption of that extra unit falls. Thus as demand for a commodity is increased by one unit, the additional utility consumed from that unit falls. From the theory of consumer behavior, the individual's marginal utility is equated to the price of the commodity. Thus as the price of a commodity rises, the demand for that commodity goes down.

2) Income effect- Let’s assume that money income is fixed. If the price of the good falls, given the money income the individual's purchasing power will rise. Hence income in real terms will expand. Thus the individual will be able to demand more goods given the money income when the price of the commodity falls.

3. Substitution effect- If the price of a particular good falls, it becomes relatively cheaper than the other available alternatives. Hence the good seems cheaper than the other ones. The consumers would switch from a relatively expensive one to a relatively cheaper one.  

4. New consumers- If the price of a commodity falls, then the demand for the good by the existing consumers increase. Moreover, the fall in prices attracts other customers to purchase the commodity.

5. Multiple uses of a commodity- There are several uses of a commodity. If the price of a good having several uses falls then probably its demand will be limited only for specific purposes. For instance, electricity can be an example.