Why does demand curve slopes downward?
Last time, we have discussed about the concept of demand. Today we will show that there is an inverse relationship between demand and quantity demanded. There are the following reasons due to fall in the demand curve (refer below figure):
1. Law of diminishing marginal utility: it means that if we go on consuming more and more units of a commodity the utility derived from each additional unit goes on diminishing. So for every additional unit the consumer is willing to spend only at less price.
2. Income effect: It means the effect on the quantity demanded when the real income of the consumer changes due to change in the price of the commodity. For example the consumer has rs. 50 and each apple cost 10 Rs. And if he buys 5 apples then he will have to pay Rs. 50. But if the price of apples falls from Rs. 10 to Rs. 8 then he will have to spend Rs. 40. This means his real income will increase and he will be able to buy anything else with the saved Rs. 10.
3. Substitution effect: it means substituting one thing for the other when it becomes cheaper. Like tea and coffee, if coffee becomes cheaper it will be substituted for tea.
4. Additional consumers: It states that if the price of the commodity falls then some more customers will be added to buy the product. For example: if the price of peas is 100 Rs. /kg then only some people will buy it but if the price of peas become 10 Rs./kg then many other people will buy it.
5. Different uses: A good may have many uses. Like milk it can be used for making curd, cheese or butter. If the price of milk reduces then it can be used for different purposes.