Some of the major reasons for this behavior of the demand curve, that is, of the normal law of demand, are listed below.
1. One of the causes of downward sloping demand curve is provided by the law of diminishing marginal utility. We know that when a consumer buys additional units of a good, its marginal utility falls. Recalling that a consumer always compares the marginal utility from a good with the price to be paid for it; the price, which he is willing to pay for additional larger amount of a good falls. Conversely, if the price of a good falls, the consumer is induced to buy more of it. In other words, the price and quantity demanded of a good move in opposite directions and the demand curved assumes a negative slope.
2. The second explanation of the normal law of demand is provided by the law of equi-marginal utility. While deciding to buy a commodity, a consumer compares not only its price with its own utility, but also with the possibility of a gain of utility by buying its substitute goods. In other words, the consumer compares the ratio of marginal utility to price of one good with similar ratios of other goods. On account of a fall in price of a good, the consumer finds that the existing equality of ratios is disturbed. This induces him substitute the lower priced good for other items of expenditure.
3. A fall in the price of a good increases the real income of the consumer. He is able to buy more of the good under question, or buy more of other goods. Similarly, an increase in the price of a good reduces his real income In this case; the income effect leads to a reduction in the demand of the good. This factor also contributes to the downward slope of demand curve.
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