Question

Using the concepts of the income effect and substitution effect, explain why the demand curve is usually downward sloping.

Answer 1

As we know that, demand is a desire backed by willingness to pay and ability to pay. We know that their is inverse relationship between price and demand. When price increases or decrease demand also decrease and increase other things being constant that is income of the consumer, tastes and preference and so on. The demand curve is convex to the origin with downward sloping shape. As the price of the good increases less of that good Is purchased at higher price than at lower price.

We know that the demand curve is downward sloping from left to right, there are two main reasons for this ,one is income effect and other is substitution effect. The substitution effect states that when the price of a good decreases, consumers will substitute away from goods that are relatively more expensive to the cheaper good. On the other hand, income effect suggests that, as the price of a good falls, real income – that is, what consumers can buy with their money income – rises and consumers increase their demand. The income effect is the change in consumption of goods by consumers based on their income.

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