Consider an economy where there are only three goods and services being sold – clothing, fruits...

Consider an economy where there are only three goods and services being sold – clothing, fruits and soda. Using this specific hypothetical economy, and the aforementioned goods, explain the three reasons why the demand curve for fruits is downward sloping along with relevant examples for each reason

Expert Solution

Downward sloping of demand curve-The demand of a product refers to the desire of acquiring it by the consumer but backed by his purchasing power and willingness to pay the price. The law of demand states that there is an inverse proportional relationship between price and demand of a commodity. When the price of commodity increases, its demand decreases.

Similarly, when the price of a commodity decreases its demand increases. The law of demand assumes that the other factors affecting the demand of a commodity remain the same.

Thus, the demand curve is downward sloping from left to right. Let us discuss in detail why demand curve slopes downward.

Why Demand Curve Slopes Downward?

There may be various reasons for the falling nature or downward sloping of demand curve. Some of them are as follows:

Causes of Downward Sloping of Demand Curve

Law of diminishing the marginal utility
Substitution effect
Old buyers

1. Law of diminishing the marginal utility

The law of diminishing marginal utility states that with each increasing quantity of the commodity, its marginal utility declines.

For example, when a person is very hungry the first fruit that he eats will give him the most satisfaction. As he will consume more fruits , his level of satisfaction will diminish.

Thus, when the quantity of goods is more, the marginal utility of the commodity is less. Thus, the consumer is not willing to pay more price for the commodity and its demand will decline.

Also, when the price of the commodity is low, its demand increases.

Hence, the demand curve slopes downwards
. Substitution effect

Let us understand this with an example. Fruits and soda are substitute goods in this hypothetical economy . If the price of fruit rises, consumers will shift to soda.

This will decrease the demand for fruits and increase the demand for soda. Thus, the demand curve of fruits will slope downwards
Old buyers

When the prices of fruits fall the old buyers tend to buy more fruits than usual thereby increasing its demand. This causes the downward sloping of demand curve.

Rahul Sunny answered 2 years ago

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