Causes of Downward Sloping Demand Curve

According to law of demand, there is a invece relationship between price of a commodity and it's quantity demanded, which ensures the demand curve slope, downward. The major causes of downward slopping of demand curve are:-

 I) Income Effect :

When a price of a commodity falls, the purchasing power of the consumer increases, due to the increase in real income of the consumer . This is because consumer has to spend less in order to buy a same quantity.
Therefore, he will buy more quantity when price falls and less quantity when price rises. This is called income effect which causes the demand curve to slope downward .

II) Substitution Effect:

When a price of a commodity falls, it becomes cheaper in comparison to its substitute and the consumer will buy more of this commodity then its substitute. For example, when the price of coffee falls, remaining the price of tea same, the demand for coffee will increase and vice versa . This is called substitution effect, which causes the demand curve to slope downword .

III) Diminishing Marginal Utility :

Marginal Utility refers to the satisfaction which is derived from the consumption of an additional unit of a commodity. When a consumer consumes successive units of commodity, the marginal utility of each additional unit declines continuously. Therefore, the consumer will buy more units of commodity when its price falls. This is the cause of downward sloping of demand curve .

IV)  New Consumer Creating Demand : 

When the price of commodity falls, some new consumers begins to purchase it as a result demand increases with the fall in price . This is the cause of demand curve to slope downward. 

V) Multiple Uses :

Many things such as electricity, coal, etc. have a multiple uses. In case of such goods when the demand falls, when it's price is high as a result demand curve to slope downward .

Demand Function

Demand function refers to the functional relationship between quantity demanded for a commodity & its determinants. It can be expressed as:-

Dx - f ( Px, y, Pr, T......)

The above demand function is said to be multivariable demand function because there are various determinants of demand. For simplicity in our study we take a single variable demand function as demand is the function of price. thus simply, demandis the function of price.

Dx= f ( PX )

Chapter 2 Part 6