[shalini mittal]

Why does demand curve slope downwards ?/ Why does the law of demand operate? or Why more of a Good is Purchases when its Price falls?

1.  Law of Diminishing Marginal Utility: This law states that  as consumption of  the commodity by consumer increases, the satisfaction obtained by the consumer from each additional unit (marginal utility) of the commodity goes on diminishing. A consumer is not interested in buying more unit of same commodity at the same price. Instead he is ready to pay the price equal to his marginal utility, which goes on diminishing. This implies that demand curve is downward sloping and when price goes down, he will purchase more units to equalize marginal utility and price.

 

2.  Substitution effect: When the price of a commodity rises and the prices of the substitutes remain constant, the substitutes seem cheaper. As a result people move towards substitutes. and vice versa.

3.   Income effect: When the price of commodity falls, the real income of a consumer increases and he can purchase more commodities with same money reverse happens with the rise in prices.

4.  Changes in number of purchasers: When the price of a commodity falls, those consumers who could not afford to buy it, can now afford to buy.

5.   Different Uses : When the price of good decreases, consumes start to use the commodity even in less important uses and thus the purchase is increased. When the price increase consumers reduce the use of this commodity for less important uses.