Q.Illustrate the reasons for negative sloping demand curve.
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Start your 14-day free trial to unlock the full solution →A demand curve slopes downward from left to right because, as price falls, quantity demanded rises. The main reasons are: the Law of Diminishing Marginal Utility (consumers buy more only at a lower price); the Income Effect (a lower price increases real income, allowing more purchases); the Substitution Effect (a good becoming cheaper is substituted for costlier goods); the entry of new buyers who can now afford the good; and the multiple uses of a good, which are expanded when its price falls.
The Negative Slope of the Demand Curve
According to the law of demand, other things being equal, more of a good is bought at a lower price and less at a higher price. This inverse relation gives the demand curve its downward (negative) slope. The reasons are:
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Law of Diminishing Marginal Utility: as a consumer buys more units, the marginal utility of each extra unit falls. He is therefore willing to buy additional units only if the price falls to match the lower marginal utility. This is the basic cause of the downward slope.
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Income Effect: when the price of a good falls, the real income (purchasing power) of the consumer rises even though money income is unchanged. With this extra purchasing power he buys more of the good.
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Substitution Effect: when a good becomes cheaper relative to its substitutes, consumers substitute it for the now relatively costlier goods, increasing its quantity demanded.
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New Buyers (New Consumers): at a high price only some consumers can afford a good; when the price falls, new buyers enter the market, raising total quantity demanded.
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