Why does Demand Curve Slopes Downward?
The demand curve in economics is defined as the graphical layout of the relationship between the product price and quantity of the product demanded. The demand curve is drawn with the price and product quantity demanded shown on the vertical axis and the horizontal axis of the graph respectively.
With a couple of exclusions, the demand curve always slopes downward from left to right direction because price and quantity demanded of the product are conversely related to each other i.e. with decline in the price of the product, the quantity demanded for such products will increase. This relationship of product’s price and quantity demanded is dependent on certain ceteris paribus (other things being equal) conditions remaining constant.
Such conditions include the total number of consumers in the market, consumer’s price expectation, price of the substitute goods, consumers taste and preference, and personal income. A change in one or more of the above mentioned conditions brings about a shift in the location of the demand curve. A shift to the left represents a decrease in demand whereas a shift to the right indicates an increase in demand.
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What is the Demand Curve?
The demand curve is the graphical representation of the number of units or commodities purchased for each of a range of conceivable prices. It represents the relation between the unit of commodities and the price of goods or services. The diagram given below shows a typical demand curve, where the price is shown on the vertical axis, and the quantity demanded is shown on the horizontal axis. This is the precise relationship between demand and price. Generally, the demand curve slopes downward (i.e.its slope is negative) because the number of unit demands increases with a fall in price and vice versa.
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Higher price results in lower demand whereas low price results in higher demand.
What Are The 7 Major Causes of Downward Sloping Demand Curves?
The 7 major causes of downward sloping demand curve are as follows:
1. Law of Diminishing Marginal Utility
The law of demand relies upon the law of diminishing marginal utility. According to the law of diminishing marginal utility, as consumers buy more units of a commodity, the marginal utility of that commodity continues to decline. Therefore, consumers will buy more units of commodities only when the price of that product begins to fall.
The utility will be high when fewer units are available and consumers will be prepared to pay more for that commodity. This proved that there will be higher demand when the price falls and lower demand when the price rises. This is why the demand curve is sloping downwards.
2. Price Effect
Every commodity has certain consumers, when the price of the commodity falls, new consumers start consuming it, as a result, demand increases. On the other hand, with the increase in the price of the commodity, many consumers will either reduce or stop its consumption, and as a result, demand decreases. Therefore, due to the price effect, the demand curve slopes downward when consumers consume more or less of the commodity.
3. Income Effect
When the price of a commodity decreases, the real income of the consumer increases because he has to spend less in order to buy the same quantity of that good. On the contrary, When the price of a commodity increases, the real income of the consumer decreases. This is termed as income effect.
Under the influence of the income effect, with a fall in price, the consumer will buy more units of that commodity and also spend a portion of income in buying other commodities. For example, with the fall in the price of milk, he will buy more of it but at the same time, he will increase the demand for other commodities.
On the contrary, with an increase in the price of the milk, he will reduce its demand. The income effect of change in the price of the commodity being positive, the demand curve slopes downward.
4. Income Group
There are different people in different income groups in every society but the majority of the people fall in the low-income group. The downward sloping of the demand curve also relies on the income group of the people. Ordinary people buy more when the price of the commodity falls whereas they buy less when the price rises. The rich do not affect the demand curve as they are well capable of buying more commodities even at high prices.
5. Different Uses of Certain Goods
The different uses of certain goods and services are also accountable for negative sloping demand curves. With the increase in the price of such goods, they will be used only for more important uses and accordingly the demand for such goods will fall. On the other hand, with a fall in price, they will put to various other uses, and accordingly, their demand will rise.
6. Substitution Effect
The substitution effect is another reason for the downward sloping demand curve. With a fall in the price of the commodity, and the price of its substitutes remaining the same, the consumer will buy more units of that commodity. As a result, demand will increase. On the other hand, with a rise in the price of the commodity, and the price of its substitutes remaining the same, the consumer will buy fewer units of that commodity. As a result, demand will decrease. For example, as the price of tea declines, and the price of coffee being unaffected, the demand for tea will rise, and conversely with an increase in the price of the tea in the market, its demand will fall.
7. Tendency To Satisfy Unsatisfied Wants.
There is always a human tendency to satisfy unsatisfied wants. Each and every person has some unsatisfied wants. When the price of goods, such as apples, falls, the consumer will buy more of that commodity as he wants to satisfy his unsatisfied wants. As a consequence of this habit of humans, the demand curve slopes downward to the right.
FAQs on Causes of Downward Slope
1. What is the law of demand?
The law of demand states that other things being constant (ceteris paribus), the price and quantity demanded of any goods and services are inversely related to each other. When the price of the commodity falls, the demand for that commodity increases and vice versa.
2. What does the downward sloping demand curve represent?
The demand curve represents the negative relationship between the price of the commodity and its quantity demanded.
3. How do the substitutes affect the elasticity of demand?
The demand for the product that has readily available substitutes is likely to be more elastic which implies that it will be more responsive to the change in the price of the product. This is because the consumer will shift towards its substitutes more easily if the price rises. On the contrary, the demand for a product may be inelastic if there are no readily available substitutes for that product and if the expenditure on that product constitutes only a small portion of its income. Firms facing inelastic demand for their product may raise their income by increasing the price of the product whereas those firms facing elastic demand cannot.
4. How does a change in the profits of the consumer impact the demand for items?
When the profits of the consumer will increase, they purchase more goods and vice-versa. Hence, profits and demand have a directly proportional relationship. This means that the demand curve slopes upward from left to right. This holds within the case of superior or normal items best.
However, this isn't the case with substandard items. Substandard goods are items of low price. Hence, while the earnings of the consumer will increase, he's going to avoid shopping for the substandard goods and shift to buying advanced or normal goods. So, the demand curve will slope downwards from left to right
5. Explain the regulation of demand, with the assistance of a hypothetical agenda.
In keeping with the regulation of demand, a client's demand shares an inverse relationship with the price of a good and vice-versa, (other things being constant). In different words, if the earnings, price of associated items, and a purchaser's tastes and possibilities stay unchanged, then the demand for a good varies inversely to the price of those goods.
The regulation of demand may be defined with the help of the subsequent demand time table.
Price of Commodity x(rs.) | Amount Demanded of x(units) |
5 | 100 |
10 | 75 |
15 | 50 |
20 | 25 |
The schedule indicates that because the price of the commodity x increases from rs.10 to rs.15, the amount demanded of x falls from 75 units to 50 devices. Consequently, there may be an inverse relationship between demand and price.
6. Explain with reason whether you 'agree' or 'disagree' with the following statement.
There are not any exceptions to the regulation of demand. No. The statement is false. The exceptions to the regulation of demand are:
Modifications inside the costs of associated goods
Tastes and choices of the customers
Earnings of the investor
Regulations in an era
Regulations in taxation coverage
Modifications in price expectancies of clients.
The regulation of demand might change in case of the above examples.
