Why does Demand Curve Slopes Downward? - Commerce PDF Download

When price fall the quantity demanded of a commodity rises and vice versa, other things remaining the same. It is due to this law of demand that demand curve slopes downward to the right.

Now, the important question is why the demand curve slopes downward, or in other words why the law of demand describing inverse price-demand relationship is valid. We can explain this with marginal utility analysis and also with the indifference curve analysis.

When the price of a commodity falls, the consumer can buy more quantity of the commodity with his given income. Or, if he chooses to buy the same amount of quantity as before, some money will be left with him because he has to spend less on the commodity due to its lower price.

In other words, as a result of the fall in the price of the commodity, consumer’s real income or purchasing power increases. This increase in real income induces the consumer to buy more of that commodity. This is called income effect of the change in price of the commodity. This is one reason why a consumer buys more of a commodity whose price falls.

The other important reason why the quantity demanded of a commodity rises as its price falls, is the substitution effect. When the price of a commodity falls, it becomes relatively cheaper than other commodities. This induces the consumer to the commodity whose price has fallen for other commodities which have now become relatively dearer. As a result of this substitution effect, the quantity demanded of the commodity, whose price has fallen, rises.

This substitution effect is more important than the income effect. Marshall explained the downward-sloping demand curve with the aid of this substitution effect alone, since he ignored the income effect of the price change. But in some cases even the income effect of the price change is very significant and cannot be ignored.

Hicks and Allen who put forward an alternative theory of demand called as indifference curve analysis of consumer’s behavior explain this downward sloping demand curve with the both income and substitution effects.

We have explained above the reasons for the downward- sloping demand curve of an individual consumer. There is an additional reason why the market demand curve for a commodity slopes downward. When the price of a commodity is relatively high, only few consumers can afford to buy it. And when the price of a commodity falls, more consumers would start buying it because some of those who previously could not afford to buy it may now afford to buy it.

Thus the number of consumers of a commodity increases at a lower price. Thus, when the price of a commodity falls, the number of its consumer’s increases and also this tends to raise the market demand for the commodity.