Question

Give two reasons for the operation of the law of demand.

Explain how the income effect is responsible for the negative slope of a demand curve.

Answer 1

1. The law of diminishing marginal utility: The law states that with consumption of an additional unit of a commodity, marginal utility derived from successive units goes on declining. A consumer. will buy more and more units of commodity only when he has to pay less and less price for each additional unit.
2. Income Effect: When the price of a commodity falls, consumers real income or purchasing power increases. This induces him to buy more of that commodity; thus, demand increases and vice versa because it diminishes marginal utility.
3. 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.