Question

Briefly explain any three determinants for the negative slope of the demand curve.

Why does the demand curve slope downward from left to right?

Explain briefly the causes of the operation of the Law of demand.

Answer 1

1. The Law of Diminishing Marginal Utility: The law of diminishing marginal utility states that when an additional unit of a commodity is consumed, the marginal utility derived from it is declining, because of the reason that the earlier units of consumption have partly satisfied our wants. This law, to a large extent, affects the law of demand.
2. Income Effect: The income effect implies a change in demand due to a change in a consumer's real income resulting from a change in the price of a commodity. As the price of a commodity decreases, the real income of the consumer (i.e., income in terms of goods and services) increases. When the price of a commodity falls, the consumer has to spend less on purchasing the same quantity of that commodity.
3. Substitution Effect: The substitution effect here means the substitution of a cheaper good for a relatively costlier one. When the price of a commodity increases, while the price of other substitute goods remains unchanged, consumers would like to substitute a costlier commodity with a cheaper commodity. For example, if the price of a commodity (e.g.. Coke) increases with no change in the price of its substitute (e.g.. Pepsi), then Pepsi will become relatively cheaper.
4. Change in number of buyers: When the price of a commodity falls, some new consumers start purchasing it, consequently the demand for that commodity increases. On the other hand, when the price rises, existing consumers may stop purchasing the commodity, thus the demand for that commodity will fall.