Derive the law of demand? Explain the reasons for the downward sloping of demand curve
Answers
Answer:
The law of demand states that there is an inverse proportional relationship between price and demand of a commodity. When the price of commodity increases, its demand decreases. Similarly, when the price of a commodity decreases its demand increases. ... Thus, the demand curve is downward sloping from left to right.
Explanation:
Demand curve is downward sloping due to following reasons :
1.Substitution effect : Suppose that the price of the good falls from p0 and p1 then the consumer will substitute other goods to buy this good. For example if you like to consume Pepsi and Coke and suddenly Pepsi drop its price you will consume more of the Pepsi at its lower price(I am assuming you are Indifferent between these two brands).
2.Income effect : As the price of the good drop from po to p1 the quantity demanded will rise because of the rise in real income of the consumer. Lets p0=10 and p1=5 and money income( M)=100, then your real income are M0=10 and M1=20 at p0 and p1 respectively, clearly you can see that the consumer can afford more number of the goods .
3.Population effect : As the price of any good falls it become affordable to more people, so at lower price more people enter the market and demand for that good.(I am assuming that there are at least some people at margin,that is when price changes people will enter or exit the market accordingly). Consider the market for the Restaurant meal and if the restaurant reduces the price of its meal by 50 then it become affordable to more people, so demand will be higher.
4.Diminishing marginal utility: Law of diminishing marginal utility says that as you consume more and more of a good you derive less and less satisfaction from the consumption of the additional unit of that good. So only at a lower price you are willing to consume more(you compare the price with the satisfaction that is derived from the consumption of that good).
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