Causes of Downward Sloping Demand Curve– According to the law of demand, as the price of a good decreases, its demand Sloping Demand Curve increases and vice-versa. Thus, there is an inverse relationship between the price of a commodity and the quantity demanded. This law ensures that the demand curve slopes downward.
- Causes of Downward Sloping Demand Curve
- FAQs Causes of Downward Sloping Demand Curve
Causes of Downward Sloping Demand Curve
This can be explained with the help of the following.
- Income effect
- Substitution effect
- Diminishing marginal unity
- New consumer creating demand
- Different Uses
Also Check: Exceptions to the Law of Demand
When the price of a commodity falls, the real income of the consumer increases. In other words, the purchasing power of the consumer increases because he has to spend less in order to buy the same quantity. Therefore, he will buy more quantity when price falls.
On the contrary, with the rise in price of the commodity, the real income of the consumer will fall. Therefore, he will buy less when price rises. This is called the income effect.
When the price of a commodity falls, it becomes cheaper in comparison to its substitutes. The consumer will buy more of this commodity to substitute other relatively costlier commodities.
For example, when the price of Coca-Cola falls, the price of Pepsi remaining the same, the demand for Coca-Cola will increase and vice-versa.
Diminishing marginal utility
Marginal utility is the utility derived from the consumption of an additional unit of a commodity. According to the law of diminishing marginal utility, the marginal utility of the commodity declines continuously.
Therefore, the consumer will buy more units of a commodity when its price falls. Thus, the demand will be more at a lower price and less at a higher price. In this way, the demand curve is downward sloping.
Also Check : What is Demand ? 5 Types Of Demand on Economic
New consumer creating demand
When the price of a commodity falls, some new consumers, who did not use to buy it at previous price, begin to purchase it. Consequently, demand increases with the fall in price.
Conversely, when the price rises, some of the consumers will reduce their purchase of the commodity and hence demand will fall.
Many things such as electricity and coal have different uses. For example, when the price of electricity is high, it will be used only for important purposes.
Thus, its demand will fall. On the other hand, as its price falls, it will be used for different purposes, such as lighting, heating room, cooking, etc. As a result, its demand increases.
FAQs Causes of Downward Sloping Demand Curve
Why does a demand curve slope downward?
The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded for that good or service increases, and vice versa. This inverse relationship between price and quantity demanded is a fundamental reason for the downward slope of the demand curve.
What are the underlying factors influencing this downward slope?
Several factors contribute to the downward slope of a demand curve. One key factor is the substitution effect. As the price of a good decreases, it becomes more attractive relative to other goods, leading consumers to shift their preferences and buy more of the now relatively cheaper good.
How does income play a role in the downward slope of the demand curve?
Changes in income can also influence the demand for a good. For normal goods, as income increases, consumers can afford to buy more of the good, leading to an increase in quantity demanded. For inferior goods, as income rises, the demand for these goods may decrease, contributing to the downward slope.
Can you explain the concept of diminishing marginal utility in relation to the demand curve?
The concept of diminishing marginal utility implies that when a client consumes more units of an item, the extra satisfaction or benefit obtained from each new unit declines. This indicates that consumers are prepared to pay more for the initial units of an item and less for each succeeding unit, which contributes to the downward-sloping demand curve.