Question

3. Why is the demand curve downward sloping? Provide at least 2 reasons.

Answer 1

The demand curve slopes downward because, holding other factors constant, consumers buy more of a good as its price falls. Key reasons:

1. Substitution effect
- When the price of a good falls, it becomes cheaper relative to other goods, so consumers substitute toward the now‑cheaper good and buy more of it.
- Example: If apples get cheaper than pears, buyers switch from pears to apples.

2. Income effect
- A price drop effectively raises consumers’ real purchasing power (they can buy the same basket for less), so for a normal good they buy more. For inferior goods the income effect can work the other way.
- Example: Lower bus fares leave people with extra money that they may spend on more bus trips.

3. Diminishing marginal utility
- Each additional unit of a good gives less extra satisfaction. Consumers will only buy more units if the price falls enough to justify the lower additional utility.
- Example: You’ll pay full price for one slice of pizza, but you’ll only buy extra slices if the price per slice is lower.

Note: Certain exceptions (Giffen goods, Veblen goods) can produce upward‑sloping demand in special cases, but these are rare.