Why is the Demand curve downward sloping?
Demand curves At higher prices, the quantity demanded is less than at lower prices. This relationship is easiest to see when a graph is plotted, as shown. Demand curves generally have a negative slope. There are at least three accepted explanations of why demand curves slope downwards:
1. The law of diminishing marginal utility
2. The income effect
3. The substitution effect
4. Multiple use of a commodity
The law of diminishing marginal utility
Diminishing marginal utility One of the earliest explanations of the inverse relationship between price and quantity demanded is the law of diminishing marginal utility. This law suggests that as more of a product is consumed the marginal (additional) benefit to the consumer falls, hence consumers are prepared to pay less. This can be explained as follows: Most benefit is generated by the first unit of a good consumed because it satisfies all or a large part of the immediate need or desire. A second unit consumed would generate less utility - perhaps even zero, given that the consumer now has less need or less desire. With less benefit derived, the rational consumer is prepared to pay rather less for the second, and subsequent, units, because the marginal utility falls. Consider the following figures for utility derived by an individual when consuming bars of chocolate.
| Quantity | 1 | 2 | 3 | 4 |
| Total Utility | 20 | 38 | 53 | 63 |
| Marginal Utility | 20 | 18 | 15 | 10 |
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.
The income and substitution effect can also be used to explain why the demand curve slopes downwards.
Income Effect
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.
Substitution Effect
The substitution effect 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.
Multiple use of commodity:
There are some commodities which have multiple uses. Their uses depend upon their respective, prices. When their prices rise they are used only for certain selected purposes. That is why their demand goes down. For example electricity can be put to different uses like heating, lighting, cooling, cooking etc. If its price falls people use it for other uses other than that. A rise in price of electricity will force the consumer to minimise its use. Thus with a fall and rise in price of electricity its demand rises and falls accordingly.