Educative Site Free Online Academic Courses Tutorials, Books with enough questions and answers
The demand curve generally slopes downward from left to right. It has a negative slope because the two important variables price and quantity work in opposite direction. As the price of a commodity decrease, the quantity demanded increase over a specified period of time, and vice versa, other things remaining constant. The fundamental reasons for demand curve to slope downward are as follows:
(i) Law of diminishing marginal utility: The law of demand is based on the law of diminishing marginal utility. According to the cardinal utility approach, when a consumer purchases more units of a commodity, its marginal utility declines. The consumer, therefore, will purchase more units of that commodity only if its price falls. Thus a decrease in price brings about an increase, in demand. The demand curve is therefore, is downward sloping.
(ii) Income effect: Other things being equal, when the price of a commodity decreases, the real income or the purchasing power of the household increase. The consumer is now in a position to purchase more commodities with the same income. The demand for a commodity thus increases not only from the existing buyers but also from the new buyers who were earlier unable to purchase at a higher price. When at a lower price, there is a greater demand for a commodity by the households the demand curve is bound to slope downward from left to right.
(iii) Substitution effect: The demand curve slope downward from left to right also because of the substitution effect. For instant, the price of meat falls and the price of other substitutes say poultry and beef remain constant. Then the households would prefer to purchase meat because it now relatively cheap. The increase in demand with a fall in the price of meat will move the demand curve downward from left to right.
(iv) Entry of new buyers: When the price of a commodity falls, its demand not only increases from the old buyers but the new buyers also enter into the market. The combined result of the income and substitution effect is that demand extends, ceteris paribus, as the price falls. The demand curve slope downward from left to right.