Why does the Demand Curve Slope Downward
There are 3 reasons that the Demand Curve slopes downward.
- Substitution Effect
- Income Effect
- Law of Diminishing Marginal Utility
Substitution Effect:
Definition - If the price of X increases then all other goods automatically become relatively cheaper so consumers will tend to substitute other goods in place of X.
(If the price of beef rises then I will switch to chicken, or pork or fish)
or - as the price of a good X decreases, consumers switch from other higher priced goods to the lower priced good X. (As the price of beef decreases I will switch from chicken, pork or fish back to beef)
Income Effect:
Definition - When the price of good X increases, consumers' real income is lowered so the quantity of good X they can afford is lowered. (When things get more expensive its harder to make ends meet)
or - When the price of a good decreases, the quantity demanded now increases because consumers now have more real income to spend. (When the price of a good decreases we can buy more of it)
Law of Diminishing Marginal Utility:
Definition - As we consume additional units of something, the satisfaction (Utility) we derive for each additional unit (marginal unit) grows smaller. (diminishes).
Law of Diminishing Marginal Utility - done well by mjmfoodie
Reffonomics - Why the Demand Curve slopes down. - Interactive
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