Answer to Question #226735 in Microeconomics for Cebo

Question

Give three reasons why a demand curve slopes downwards?

May i have a detailed answer.

Answer 1

Downward slope of demand curve indicates that more quantity is purchased in response to fall in price. Thus, there is inverse relationship between own price of a commodity and its quantity demanded. This may be explained in terms of the following factors : (i) Law of diminishing marginal utility : According to this law, as consumption of a commodity increases, the utility from each successive unit goes on diminishing. Accordingly, for every additional unit to be purchased the consumer is willing to pay less price. (ii) Income effect : Change in own price of a commodity causes a change in real income of the consumer. With a fall in price, real income increases. Accordingly, demand for the commodity expands. (iii) Substitution effect : When price of commodity X falls, it becomes cheaper in relation to commodity Y. Accordingly, X is substituted for Y and demand of X increases.