Answer to Question #226734 in Macroeconomics for Cebo

Question

Give three reasons why a demand curve slopes downwards..

May I have a detailed explanation.

Answer 1

The demand curve slope can be explained by the income effect, substitution effect, and the law of diminishing marginal utility.

• Income effect

An increase in the price of a product relative to the income of individuals causes a fall in quantity demanded. On the contrary, a decline in the price of a product relative to the income of individuals results in a rise in the quantity demanded. This scenario is referred to as the income effect and results in a downward-sloping demand curve.

• Substitution effect

If there is a rise in the product's price while the price of substitutes remains unchanged, the consumers will demand less of the product as the substitutes become more attractive. Conversely, if there is a decline in the price of a product while the price of substitutes remains constant, the buyers will buy more of the product since the substitutes become less attractive. This phenomenon is called the substitution effect and causes the demand curve to slope downwards.

• The law of diminishing marginal utility

As an individual take an additional unit of a product, the marginal utility gained from the product diminishes. Hence, the buyer will only purchase more units of the good if the price declines. However, if the price of the good remains hiked, lower units of the product will be consumed. This scenario culminates in a downward sloping demand curve.