Thursday, February 20, 2014

Why does demand curve slopes downward?

Why does demand curve slopes downward?

Demand curve slopes downward from left to right (Negative Slope). There are many causes for downward sloping of demand curve:-

1)  Law of Diminishing Marginal utility

As the consumer buys more and more of the commodity, the marginal utility of the additional units falls. Therefore the consumer is willing to pay only lower prices for additional units. If the price is higher, he will restrict its consumption

2)  Principle of Equi- Marginal Utility

Consumer will arrange his purchases in such a way that the marginal utility is equal in all his purchases. If it is not equal, they will alter their purchases till the marginal utility is equal.
3)  Income effect.

When the price of the commodity falls, the real income of the consumer will increase. He will spend this increased income either to buy additional quantity of the same commodity or other commodity.

4)  Substitution effect.

When the price of tea falls, it becomes cheaper. Therefore the consumer will substitute this commodity for coffee. This leads to an increase in demand for tea.

5)  Different uses of a commodity.

Some commodities have several uses. If the price of the commodity is high, its use will be restricted only for important purpose. For e.g. when the price of tomato is high, it will be used only for cooking purpose. When it is cheaper, it will be used for preparing jam, pickle etc...

6)  Psychology of people.

Psychologically people buy more of a commodity when its price falls. In other word it can be termed as price effect.

7)  Tendency of human beings to satisfy unsatisfied wants.