State the Law of Demand. Briefly explain any three determinants for the negative slope of the demand curve.
The 'Law of Demand' states that other things being equal, "A rise in the price of a commodity is followed by a fall in demand and a fall in price is followed by rise in demand." In other words, it states that there is an inverse relationship between the price of a commodity and its demand.
The three determinants for the negative slope of the demand curve are:
(i) Income Effect: When the price of a commodity falls, a consumer has to spend less on the purchase of the same amount of the commodity. Thus, it increases his purchasing power or real income which in turn, enables him to purchase more of the commodity. Thus, the effect on demand for goods due to the change in the real income in the price of the commodity is known as the income effect.
(ii) Substitution Effect: Substitution effect means substitution of one commodity for another when it becomes relatively cheaper. If the price of one commodity rises, the consumer shifts to other commodity, which is a relatively cheaper.
(iii) Law of Diminishing Marginal Utility: The law of diminishing marginal utility tells us that the marginal utility of the goods falls with increase in its quantity. That is why, this law is shown by a downward sloping demand curve. A consumer pays for a commodity because it possesses utility and he would purchase a commodity to the extent, where its marginal utility becomes equal to its price.
(iv) New Customers: It is possible that at a particular price some consumers may not be able or may not be willing to purchase the commodity. But as price falls some new customers start to purchase the commodity. Contrary to it, when price rises some old customers may stop to purchase the commodity.
The 'Law of Demand' states that other things being equal, "A rise in the price of a commodity is followed by a fall in demand and a fall in price is followed by rise in demand." In other words, it states that there is an inverse relationship between the price of a commodity and its demand.
The three determinants for the negative slope of the demand curve are:
(i) Income Effect: When the price of a commodity falls, a consumer has to spend less on the purchase of the same amount of the commodity. Thus, it increases his purchasing power or real income which in turn, enables him to purchase more of the commodity. Thus, the effect on demand for goods due to the change in the real income in the price of the commodity is known as the income effect.
(ii) Substitution Effect: Substitution effect means substitution of one commodity for another when it becomes relatively cheaper. If the price of one commodity rises, the consumer shifts to other commodity, which is a relatively cheaper.
(iii) Law of Diminishing Marginal Utility: The law of diminishing marginal utility tells us that the marginal utility of the goods falls with increase in its quantity. That is why, this law is shown by a downward sloping demand curve. A consumer pays for a commodity because it possesses utility and he would purchase a commodity to the extent, where its marginal utility becomes equal to its price.
