In economics, ‘demand‘ relates to the desire of people to purchase something and the willingness to pay for it. The law of demand explains the functional relationship between the price of a commodity and its demand. The most important tool that explains this relationship is the demand curve. This curve is always downward sloping due to an inverse relationship between price and demand.
The Law of Demand
Demand, in economic terms, basically means the desire to purchase something. However, the desire itself is not sufficient. It also requires the willingness and purchasing power of people to acquire the commodity.
According to the law of demand, when other factors are constant, there is an inverse relationship between price and demand. In other words, the demand for something increases as its price false. Conversely, demand reduces when the price increases.
We can understand this inverse relationship using the following individual demand schedule:
This schedule shows the individual demand for a commodity at various market prices. As we can observe, the demand is increasing as the price falls. This is because people will spend less money when prices are high. On the other hand, they will purchase more when prices are low.
From the demand schedule we have seen above, we can derive the following demand curve:
This graph also shows the demand curve falling as the price reduces. The downward sloping of this curve explains the law of demand. Furthermore, its rightward shift with falling prices indicates increasing demand.
A similar market demand curve showing demands of various commodities of the same kind will also look the same. This indicates that a demand curve is always downward sloping. The extent to which a curve slopes might differ but its downward direction is inevitable.
Such downward sloping of demand curves from left to right explains the law of demand. This happens because of the inverse relationship between price and demand.
Causes for Downward Sloping of Demand Curves
The following are some of the causes explaining why demand curves always slope downwards:
1) The law of diminishing the marginal utility
According to this principle, the marginal utility of a commodity reduces when the quantity of goods is more. Consequently, when the quantity is more, the prices will fall and demand will increase. Hence, consumers will demand more goods when prices are less. This is why the demand curve slopes downwards.
2) Substitution effect
Consumers often classify various commodities as substitutes. For example, many Indian consumers may substitute coffee and tea with each other for various reasons. When the price of coffee rises, consumers may switch to buying tea more as it will become relatively cheaper.
Economists refer to this as the substitution effect. Hence, if the price of tea reduces, its demand will increase and the demand curve will be downward sloping.
3) Income effect
According to this principle, the real income of people increases when the prices of commodities reduce. This happens because they spend less in case of falling prices and end up with more money. With more money, they will, in turn, purchase more and more. Therefore, the demand increases as prices fall.
4) New buyers
Whenever the price of a commodity decreases, new buyers enter the market and start purchasing it. This is because they were unable to purchase it when the prices were high but now they can afford it. Thus, as the price falls, the demand rises and the demand curve becomes downward sloping.
5) Old buyers
This rule is basically a corollary of the new buyers rule. When the price of a commodity decreases, the old buyers can afford to buy even more quantities of it. As a result, this results in demand increasing and the demand curve slopes downwards.
Example on Causes of Downward Sloping
Question: Read the following statements and mention which cause of downward sloping they refer to.
(a) Consumers often substitute one commodity for another.
(b) A commodity’s utility always reduces when the supply of goods is more.
(c) Affordability of goods allows more people to buy them.
(d) Falling prices result in people retaining more money for other uses.
(e) Existing customers purchase even more quantities at lower prices.
Answers: (a) Substitution effect (b) Law of diminishing marginal utility (c) New buyers (d) Income effect (e) Old buyers