Question

What do you understand by demand function ? Why does a demand curve fall from left to right ?

Hint:

The slope of the demand curve is a direct visual representation of the Law of Demand. The three core reasons for this law are the income effect, the substitution effect, and diminishing marginal utility.

Answer 1

Part 1: What is a Demand Function?
A demand function is a mathematical equation that expresses the functional relationship between the quantity demanded of a commodity and the various factors that influence this demand. It shows how the quantity demanded of a product depends on its own price, the prices of related goods, the consumer's income, tastes and preferences, etc.
A general demand function can be written as: \[ Q_{dx} = f(P_x, P_r, Y, T, E, \dots) \] where: \begin{itemize} \item \(Q_{dx}\) = Quantity demanded of good X \item \(P_x\) = Price of good X \item \(P_r\) = Price of related goods (substitutes or complements) \item \(Y\) = Consumer's income \item \(T\) = Tastes and preferences \item \(E\) = Expectations about future prices \end{itemize} When we simplify this by holding all factors constant except for the price of the good itself (the ceteris paribus assumption), we get a simple demand function like \(Q_{dx} = a - bP_x\), which is then used to draw the demand curve.
Part 2: Why does a Demand Curve fall from left to right?
A demand curve falls from left to right, indicating a downward slope. This is a graphical representation of the **Law of Demand**, which states that, other things being equal, as the price of a commodity falls, its quantity demanded rises, and as the price rises, its quantity demanded falls. The main reasons for this inverse relationship are: \begin{enumerate} \item Law of Diminishing Marginal Utility: As a consumer consumes more and more units of a commodity, the additional satisfaction (marginal utility) derived from each successive unit goes on diminishing. Therefore, the consumer is willing to pay a lower price for additional units, leading to a downward-sloping demand curve. \item Income Effect: When the price of a commodity falls, the real income (or purchasing power) of the consumer increases. With this increased purchasing power, the consumer can buy more of the same commodity. \item Substitution Effect: When the price of a commodity falls, it becomes relatively cheaper compared to its substitutes. Consumers tend to substitute the cheaper good for the more expensive ones, which increases the quantity demanded of the cheaper good. \item Entry of New Consumers: When the price of a commodity falls, new consumers who were previously unable to afford it can now purchase it, thus increasing the overall quantity demanded in the market. \end{enumerate}