What are the causes of downward slope of demand curve?
Causes of downward slope of demand curve are:
1. Law of Diminishing Marginal Utility : This law states that when a consumer buys more units of same commodity, the marginal utility of that commodity continues to decline. This means that the consumer will buy more of that commodity when price falls and when less units are available, utility will be high and consumer will prefer to pay more for that commodity. This proves that the demand would be more at lower prices and less at a higher price and so the demand curve is downward sloping.
2. Income effect : As the price of the commodity falls, the consumer can increase his consumption since his real income is increased. Hence he will spend less to buy the same quantity of goods. On the other hand, with a rise in price of the commodities the real income of the consumer will fall and will induce them to buy less of that good.
3. Substitution effect : When the price of a commodity falls, the price of its substitutes remaining the same, the consumer will buy more of that commodity and this is called the substitution effect. The consumer will like to substitute cheaper one for the relatively expensive one on the other hand, with a rise in price the demand fall due to unfavorable substitution effect. It is because the commodity has now become relatively expensive which forces the consumer’s to buy less.
4. Goods having multipurpose use : Goods which can be put to a number of uses like coal, aluminum, electricity, etc. are eg. of such commodities. When the price of such commodity is higher, it will not used for a variety of purpose but for use purposes only. On the other hand, when price falls of the commodity will be used for a variety of purpose leading to a rise in demand. For eg : if the price of electricity is high, it will be mainly used for lighting purposes, and when its price falls, it will be needed for cooking.
5. Change in number of buyers : Lower the price, will attract new buyers and raising of price will reduce the number of buyers. These buyers are known as marginal buyers. Owing to such reason the demand falls when price rises and so the demand curve is downward sloping.