Question

Why does demand curve slope downward?

Hint:

The demand curve slopes downward because of the substitution and income effects, as well as the law of diminishing marginal utility. As prices rise, demand generally falls due to these factors.

Answer 1

Step 1: Understanding the Law of Demand:
The law of demand states that, all else being equal, the quantity demanded of a good or service decreases as the price increases. Conversely, as the price decreases, the quantity demanded increases. This negative relationship between price and quantity demanded is why the demand curve typically slopes downward from left to right. The demand curve is a graphical representation of this law.
Step 2: The Substitution Effect:
The substitution effect occurs when a price change makes a good more or less attractive relative to other goods. When the price of a product rises, consumers may substitute it with a cheaper alternative, reducing the quantity demanded for the higher-priced good. Conversely, when the price of a good decreases, it becomes more attractive compared to substitutes, and consumers increase their demand for it. This substitution behavior contributes to the downward slope of the demand curve.
Step 3: The Income Effect:
The income effect refers to how a price change impacts a consumer’s purchasing power. When the price of a good decreases, consumers can afford to buy more of the good with the same income, effectively increasing the quantity demanded. Conversely, when the price increases, the consumer’s purchasing power decreases, leading to a lower quantity demanded. The income effect reinforces the inverse relationship between price and demand, causing the demand curve to slope downward.
Step 4: The Law of Diminishing Marginal Utility:
The law of diminishing marginal utility states that as a person consumes more of a good or service, the additional satisfaction (utility) derived from each additional unit decreases. As prices rise, consumers will only purchase more units of a good if they perceive the marginal utility justifies the higher price. This phenomenon also leads to a downward-sloping demand curve because consumers are less willing to buy as the price increases.
Step 5: Final Conclusion:
The demand curve slopes downward due to the combined effects of substitution, income, and diminishing marginal utility. Each of these factors leads consumers to demand less of a good as its price rises, reinforcing the negative relationship between price and quantity demanded.