Q.What does negative demand curve shows and state any three causes behind it?
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Start your 14-day free trial to unlock the full solution →This question offers a choice between (1) explaining the negative demand curve and its causes, and (2) explaining the total-expenditure method of measuring price elasticity of demand. Both are answered below.
Option 1: What the negative demand curve shows, and its causes
A negative (downward-sloping) demand curve shows the inverse relationship between the price of a commodity and its quantity demanded, other factors remaining constant — i.e., as price falls, quantity demanded rises, and as price rises, quantity demanded falls. This inverse relationship is the content of the Law of Demand. Plotted on a graph with price on the Y-axis and quantity demanded on the X-axis, this relationship produces a curve sloping downward from left to right (negative slope).
Three causes behind the negatively-sloped demand curve:
- Law of Diminishing Marginal Utility: As a consumer buys successive units of a good, the marginal utility derived from each extra unit keeps falling. A rational consumer, who equates marginal utility (in money terms) with price, will therefore buy an additional unit only if its price falls to match the lower marginal utility — hence more is bought only at a lower price.
- Substitution Effect: When the price of a good falls (other prices remaining the same), it becomes relatively cheaper compared to its substitutes. Consumers then substitute away from the now relatively costlier substitutes toward the cheaper good, raising its quantity demanded.
- Income Effect: When the price of a good falls, the consumer's real income (purchasing power) effectively rises, since the same money income can now buy more of the good (or other goods). This increase in real income generally leads the consumer to buy more of the good (for a normal good), again causing quantity demanded to rise as price falls.
(A fourth cause sometimes mentioned is the entry of new buyers into the market as price falls, since the good now becomes affordable to a wider section of consumers — any three of these causes may be stated.)
Option 2 (OR): Expenditure (Total Outlay) method of measuring price elasticity of demand
The total expenditure method measures price elasticity of demand by observing how a consumer's/ market's total expenditure (Total Expenditure = Price × Quantity demanded) changes when the price of a commodity changes.
- If total expenditure rises when price falls (and falls when price rises): demand is elastic (Ed > 1) — the percentage rise in quantity demanded is greater than the percentage fall in price, so total outlay (P×Q) increases even though price has fallen. …
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