Question

explain the reason for the operation of law of demand

Answer 1

The following are the reasons for theoperation of law of demand.1.Law of Diminishing Marginal Utility:According to this law, marginal utility derived from every additionalunit of a good consumed tends to decline at the same price. Consequently, for each additional unit of the good, the consumer is willing to pay a lesser price. Thus, the consumer will increase his demand only when the price falls.2. Several Uses of a Good: A commodity can be used for different purposes.If the price of the commodity increases, then it will be used only for the important purposes, thereby, the demand for the good will reduce.On the contrary, with the fall in the price, the good will be put to various uses and consequently the demand will rise. 3. Number of Consumers: With a fall in the price of a good, some new consumers enter the market who can now afford the good. Thus, the demand for the good increases and vice-versa. 4.Substitution Effect: It implies that a rise in the price of a good makes its substitute goods relatively cheaper. This leads to an increase in demand for the substitute goods and decrease in demand for the gooditself. 5. Income Effect: It implies that a rise in the price of a good leads to the fall in the purchasing power of the money income of the consumer and consequently leadsto the decrease in the demand for good. This is because lesser of good can be purchased with the same amount of money.