Demand : reasons for Downward slope of the Demand Curve

On the basis of the law of demand, the demand curve slopes negatively downwards from left to right.

Demand curve showing negative slope

Negative slope in demand curve shows inverse relationship between the price and the quantity demanded.

Reasons for Downward Sloping :

1. Law of Diminishing Marginal Utility :

# Marginal Utility : Satisfaction derived by the consumption of one additional unit of the commodity.

• Marginal Utility of the commodity falls with an increase in its consumption.

• A consumer will maximise his satisfaction when he equalises the marginal utility of the commodity with its prices.

[Marginal Utility of a commodity = Price of the commodity]

• A consumer would purchase a larger quantity of a commodity only when its price falls because the marginal utility from additional units falls.

2. Income Effect :

The downward sloping of demand curve is mainly due to the change in real income due to the change in the price of the commodity.
The change in the demand, due to the change in the real income resulting from a change in the price of the commodity is known as Income Effect.
When the price of a commodity falls, a consumer can buy a larger quantity of the commodity with his given money income. Or he can save money.
Thus, a fall in the price of the commodity results in an increase in his real income, i.e. purchasing power of given money income.
A part of this real income is used to buy more of that commodity.
Hence, fall in the price causes rise in quantity demanded of that commodity.

3. Substitution Effect :

When the quantity demanded is affected by the change in relative prices of substitute goods, this effect is known as substitute effect.
When the price of a commodity falls and the prices of its substitutes remain unchanged, it becomes relatively cheaper than its substitute.
Consumer will tend to buy relatively cheaper good, so the demand for the cheaper commodity will increase.
Example: When price of coffee falls, remaining the price of tea is same, coffee become relatively cheaper. Consumer would naturally shift to coffee than tea.
This increased demand, due to the commodity becoming relatively cheaper is known as the Substitution Effect.

# Price Effect:

The sum total of the income effect and substitution effect is called the Price Effect.

[Price Effect = Income effect + Substitutions effect]

4. Increase in the Number of Consumer :

When the price of a commodity falls, many new consumers will start purchasing this commodity.
At very high price, only a few rich people can afford to buy that commodity.
When the price of the commodity falls a little, several more people with moderate income, can buy this commodity.
When the price drop considerably, a lot more people, with low income can buy the commodity leading a vast increase in demand.
Example: When the price of apple is Rs 100/kg only a few people can buy it. But when the price falls to Rs 70/ kg of apples, thousands more people can buy, who could not afford to buy it to buy it earlier. Consequently there is a rise in demand with the fall in price.

5. Several uses of a Commodity :

Some commodities which have multiple uses steel, aluminium, coal,electricity, milk etc.
When the prices of such commodities are very high, they will be used for more important purpose only. Thus only a small quantity is demanded.
When their prices fall, these commodities will be put to a less important uses, also leading to an increase in demand.
Example, When price of electricity is very high, it will be used mainly for lighting purpose.
When its price falls, it will be used for cooking as well.