More About Demand Curve

Why Does Demand Curve Slopes Downward to the Right?

It has been explained in an earlier post that the Demand curves slopes downward from left to the right. The negative sloping curve is based on the law of demand. Now the question arises, why does the demand curve slopes downwards to the right? In other words, what is the explanation of the law of demand? These can be explained  in terms of the following factors:

    (1) Law of Diminishing Marginal Utility: This law states that with an increase in the units of a commodity consumed, every additional unit of the commodity gives lesser satisfaction to the consumer. A consumer will maximize his satisfaction when he equalizes the marginal utility of the commodity with its price, i.e.,
                          Marginal utility of a commodity = Price of the quantity.

From this equilibrium condition, it  follows that a consumer would purchase a larger amount of commodity only when its price falls because the marginal utility from additional utility falls.

  (2) Income Effect: A change in demand on account of change in real income resulting from change in the price of a commodity is known as income effect.

Suppose a consumer is spending ₹120 on purchase of apples , and he is able to purchase 2 kg of apples when the price of apples is ₹60 per kg.Now suppose the price of apple falls  to ₹50 per kg. If the consumer continues to buy 2 kg of apples as before, he has to spend only ₹100. He is, therefore able to save ₹20. It means his real income(in terms of apples) has increased. The consumer may use this increased real income(i.e., ₹20 saved in purchasing the original quantity of apples at a lower price) in purchasing more apples. Thus, a fall in price of a commodity causes increase in real income and thereby increase in the quantity of commodity demanded.

  (3) Substitution Effect: The substitution effect is the effect that a change in relative prices of substitute goods has on the quantity demanded.
For instance if the price of coffee falls, the price of tea remaining the same, coffee will become relatively cheaper. Coffee becomes more attractive to people in comparison with tea. This increase in demand on account of a commodity  becoming relatively cheaper is known as substitution effect.
The sum total of income effect and substitution effect is called the price effect.

                                  Price effect = Income effect + Substitution effect

(4) Increase in number of consumers: A fall in the price of a commodity leads to an increase in quantity demanded  by the existing customers due to income and substitution effect. At the same time, at high prices only a few rich people can afford to buy that commodity. When the price of that commodity falls a little, people with moderate income will also be able to purchase that commodity. At still lower prices, even the poor persons will be able to afford it and, therefore the demand for the commodity will rise.

(5) Several uses of a commodity: There are some goods that can be put to number of uses.Some of them are more important , while others are less important. Steel, aluminium, coal, electricity, milk are examples of such commodities.When the price of such commodities are very high, they can be used for more important puposes only and, therefore, a small quantity will be in demand. But when the price falls, the commodity will be put to less omportant uses also, leading to an increase in demand. For example, when the price of electricity is very high, it will be used mainly for lighting puposes. When the price falls, it will be used for cooking as well.