Why does demand curve downward

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This occurs due to the inverse relationship between price and demand. There can be many reasons for the falling nature or downward slope of the demand curve.

A number of them are as follows:. Causes of the downward slope of the demand curve Law of demand. Substitution effect. Earnings impact. New consumers. Antique consumers. The law of demand states that with ever-increasing amounts of the commodity, its demand declines. As an example, whilst someone is hungry, the first chapati that he eats will provide him with the most pride.

As he's going to eat chapatis, his degree of satisfaction will diminish. Consider the following figures for utility derived by an individual when consuming bars of chocolate. While total utility continues to rise from extra consumption, the additional marginal utility from each bar falls.

If marginal utility is expressed in a monetary form, the greater the quantity consumed the less the marginal utility and the less value derived — hence the rational consumer would be prepared to pay less for that unit.

If marginal utility is expressed in a monetary form, the greater the quantity consumed the lower the marginal utility and the less the rational consumer would be prepared to pay. The income and substitution effect can also be used to explain why the demand curve slopes downwards.

If we assume that money income is fixed, the income effect suggests that, as the price of a good falls, real income — that is, what consumers can buy with their money income — rises and consumers increase their demand.

Therefore, at a lower price, consumers can buy more from the same money income, and, ceteris paribus , demand will rise. Conversely, a rise in price will reduce real income and force consumers to cut back on their demand. In addition, as the price of one good falls, it becomes relatively less expensive. Therefore, assuming other alternative products stay at the same price, at lower prices the good appears cheaper, and consumers will switch from the expensive alternative to the relatively cheaper one.

It is important to remember that whenever the price of any resource changes it will trigger both an income and a substitution effect. It is possible to identify some exceptions to the normal rules regarding the relationship between price and current demand.

Giffen goods are those which are consumed in greater quantities when their price rises. These goods are named after the Scottish economist Sir Robert Giffen , who is credited with identifying them by Alfred Marshall in his highly influential Principles of Economics In essence, a Giffen good is a staple food, such as bread or rice, which forms are large percentage of the diet of the poorest sections of a society, and for which there are no close substitutes.