Why Does the Demand Curve Slope Downward?

Several distinct economic reasons, working together, explain why the demand curve normally slopes downward from left to right — that is, why quantity demanded rises as price falls.

1. The Law of Diminishing Marginal Utility. As a consumer buys successive units of a commodity, the additional (marginal) utility from each extra unit tends to fall. A rational consumer buys extra units only if the price falls enough to justify the lower additional satisfaction the next unit gives — so a fall in price is needed to induce the purchase of more units, producing the inverse price-quantity relationship.

2. The Income Effect. When the price of a commodity falls, and the consumer's money income stays the same, the consumer's real income (purchasing power) effectively rises — the same money now buys more. Part of this increased real income is typically spent on buying more of the very commodity that became cheaper, raising quantity demanded.

3. The Substitution Effect. When the price of a commodity falls while the prices of its substitutes remain unchanged, the commodity becomes relatively cheaper compared with its substitutes. Consumers rationally substitute toward the now-cheaper good and away from its relatively costlier substitutes — for example, a fall in the price of tea, with coffee's price unchanged, leads some coffee-drinkers to substitute toward tea, raising the quantity of tea demanded.

4. The New Consumers (Extension of the Market) Effect. At a high price, some potential buyers may be priced out of the market altogether — unable to afford the commodity at all. As the price falls, such buyers enter the market for the first time, adding their demand to that of existing buyers and raising total quantity demanded — the market for the good literally extends to a wider set of consumers. …