A demand curve is the graphical representation of the demand schedule for a commodity. It is the graphic statement of an individual buyer’s reaction on amount demanded at a given price in the given point of time. A demand curve has got a negative slope. It slopes downwards from left to right. A demand curve shows the maximum quantities per unit of time that consumers will buy at various prices. In the words of Richard Lipsey “The curve which shows the relation between the price of a commodity and the amount of that commodity the consumer wishes to purchase is called Demand Curve.
(1) Law of diminishing marginal utility:
A consumer always equalises marginal utility with price. The law states that a consumer derives less and less satisfaction (utility) from the every additional increase in the stock of a commodity. When price of a commodity falls the consumer’s price utility equilibrium is disturbed i.e. price becomes smaller than utility.
The consumer in order to restore the new equilibrium between price and utility buys more of it so that the marginal utility falls with the rise in the amount demanded. So long the price of a commodity falls, the consumer will go on buying more amount of it so as to reduce the marginal utility and make it equal with new price.
Thus the shape and slope of a demand curve is derived from the slope of marginal utility curve.
(2) Income effect:
Another cause behind the operation of law of demand is income effect. As the price of a commodity falls, the consumer has to buy the same amount of the commodity at less amount of money. After buying his required quantity he is left with some amount of money.
This constitutes his rise in his real income. This rise in real income is known as income effect. This increase in real income induces the consumer to buy more of that commodity. Thus income effect is one of the reasons why a consumer buys more at falling prices.
(3) Substitution effect:
When the price of a commodity falls, it becomes relatively cheaper than other commodities. The consumer substitutes the commodity whose price has fallen for other commodities which becomes relatively dearer.
For example with the fall in price of tea, coffees. Price being constant, tea will be substituted for coffee. Therefore the demand for tea will go up.
(4) New consumers:
When the price of a commodity falls many other consumers who were deprived of that commodity at the previous price become able to buy it now as the price comes within their reach. For example the units of colour TV. increases with a remarkable fall in price of it. The opposite will happen with a rise in prices.
(5) 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.