What are the causes of the downward sloping demand curve?
Hi everyone. We have seen the types of the demand curve, the law of demand, and the exceptions to the law of demand. Now, is the time to discuss the reasons or the causes behind the downward sloping demand curve. Before proceeding further, you can revise the law of demand, it will help you in understanding this concept better. Let’s learn.
The causes or the reasons behind the downward sloping demand curve
- The law of diminishing marginal utility.
- The Income effect.
- The Substitution effect.
- Size of the consumer group or the market size.
- Alternative uses of the commodity.
There are more reasons as well that lead demand to slope downward. But in this blog post, I will be covering the important ones only.
The law of diminishing marginal utility (LDMU)
According to the law of diminishing marginal utility, when a consumer consumes more and more units of one commodity, the satisfaction derived from each successive unit keeps on falling (i.e., diminishing). Similarly, demand for a commodity depends upon its utility (i.e., use-value). So, keeping other things constant (i.e., ceteris paribus), a consumer buys more units of a commodity, if they have to pay less price for it, and vice-versa. This causes the demand curve to slope downward.
The downward-sloping portion of the Marginal Utility curve is known as the demand curve.
The Income effect
The income effect is an effect of change in quantity demanded when the real income (purchasing power) of a buyer changes due to change in the price of the commodity. The decrease in price leads to an increase in real income and accordingly more demand. On the other hand, real income falls due to a rise in the price of the commodity, causing demand to fall.
The Substitution effect
Substitution effect refers to the substitution of one commodity in place of another commodity when one of them becomes relatively cheaper. For example, a rise in the price of a coffee would cause substituting coffee with tea (tea and coffee are a classic example of substitute goods). As tea seems relatively cheaper in comparison to coffee, it leads to a downward-sloping demand curve for coffee.
Size of consumer group or the market size
The decrease in the price of a commodity leads to an increase in the size of the consumer group (i.e., more people can afford the commodity who were earlier not able to purchase that commodity) that causes a higher demand for that particular commodity. Similarly, if the price increases, the overall demand will decreases because consumers cannot afford to buy it. Hence, it leads to a downward-sloping demand curve.
Alternative uses of the commodity
If a commodity is highly-priced, then its use becomes limited, it means less demand for it. Let me explain this with an example, suppose when the electricity tariff is high, then each one of us tries to limit its usage as it is costly. But, if the electricity tariff will fall (I know, that’s not going to happen anytime soon in the future), then people can use it lavishly. So, this is also the reason behind the downward slope of the demand curve.
Trick to memorize the causes behind the downward sloping demand curve, Use the acronym MAIDS, where M stands for Market size, A stands for Alternative uses, I- Income Effect, D – Diminishing marginal utility and S – Substitution effect.
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