Rationale behind sloping of demand curve
- Law of diminishing marginal utility: The marginal utility of the consumer will go on decreasing with the increase in the consumption of the goods by him.
- Income effect: When the price of a commodity falls, the consumer can buy more quantity of goods with his given income or same quantity at a lesser amount. As a result of this, the consumerâ€™s real income or purchasing power increases. This induces him to buy more.
- Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other commodities. It induces the consumers to substitute the commodity, the price of which has fallen for other commodities which have now become relatively expensive. As a result of this, the demand for the commodity, the price of which has fallen increases. So, more people will use the product and the frequency of use also increases.
- New consumers: When the price of the commodity falls, new consumers may enter the market because those who could not previously afford to buy the product may be able to purchase it now. This will lead to an increase in quantity demanded.
- Different uses: Certain commodities have multiple uses. If their prices fall, they will be used for varied purposes and demand for such commodities will increase. When the price of such commodities rises they will be put to limited uses only. Thus, different uses of a commodity made the demand curve slope downwards reacting to changes in price.