Demand 2 - Why does the Demand Curve Slope Downward

Why does the Demand Curve Slope Downward

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Pajholden doing it well.

There are 3 reasons that the Demand Curve slopes downward.

1. Substitution Effect
2. Income Effect
3. 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

http://www.reffonomics.com/TRB/chapter4/SlopeofDemandCurveFINAL1.swf