Chapter – 1: Concept of Demand – II

Demand Curve

Q.2. Why does a demand curve usually slope downward to the right? Are there any exceptions to it?

Ans. Usually, a demand curve slopes downward to the right. This means the slope of the demand curve is negative. A downward-sloping demand curve shows an inverse relationship between the price and the quantity demanded. In the diagram, DD is the demand curve. On the Y-axis, price is represented and, on the X-axis, demand is represented. When the price is OP, demand is OQ. When the price goes down from OP to OP1′ demand goes up from OQ to OQ1. Similarly, when the price rises from OP1 to OP, demand comes down from OQ1 to OQ.

Demand Curve

A decline in price leads to a downward decline in the demand curve, but at the same time, it leads to an increase in demand which, in turn, makes it extend towards the right. That is why a demand curve usually slopes downward to the right.

Demand Curve is a graphical representation of a demand schedule which, in turn, shows the inverse relationship between price and quantity demanded. Therefore, for the proper understanding of the downward sloping nature of the demand curve, we have to know why price and quantity demanded are inversely related. Their inverse relationship becomes clear from the following:

  1. Law of Diminishing Marginal Utility: According to this law, if a consumer constantly consumes the units of a commodity, the utility which he gets from the successive units, shall go on declining. In other words, the marginal utility of a commodity goes on declining from its successive units whenever a consumer consumes its units continuously. This means, if someone has more of a commodity, he shall have units having lesser utility or, in other words, the marginal utility of that commodity will be less. However, the price of a commodity is equal to its marginal utility. As such the consumer shall have more of that commodity only when he pays less for it and vice-versa. This simply means that demand shall be more when the price is less and vice-versa.
  2. Income Effect: With the changes in price, money income remaining the same, real income is inversely affected. For example, if the price declines, then real income goes up. This means a consumer shall have more of a commodity when price declines and vice-versa.
  3. Substitution Effect: Changes in the price of a commodity make it relatively dearer or cheaper in comparison to its substitutes, with the result it is demanded either less or more. For example, if the price of a commodity goes down, it relatively becomes cheaper in relation to its other substitutes. As a result, now people will demand more of it. The opposite will be the case when the price rises.
  4. Many uses of a Commodity: There are commodities that are used in many different ways such as electricity. An increase in the price of such a commodity would restrict its use to important uses. For example, now, electricity may not be used for heating the water or cooling the room. On the other hand, if there is a decline in the price of such a commodity, it will be used for more things. As such, because of the many uses of a commodity, the demand of such a commodity will be more when its price is less and vice-versa.

Exceptions to the Law of Demand: In the following cases, a decline in price does not lead to an increase in the demand and an increase in the price does not lead to a decline in the demand:

  1. Inferior Goods: There are some commodities whose demand declines with the decline in its price and vice-versa. This paradox is known as the Giffin Paradox because Giffin was the first economist to draw attention to this paradox. According to Giffin, the demand for inferior goods declines with the decline in their price and their demand goes up with the increase in their price. Such commodities are known as Giffin Goods.
    However, all the inferior goods are not an exception to the law of demand or all inferior goods are not Giffin goods. All those commodities are inferior commodities whose income effect is negative. However, the law of demand does not apply only to those inferior goods whose positive substitution effect is less than the negative income effect. The law of demand applies to those inferior commodities whose substitution effect is stronger than the negative income effect.
  2. Price Tendency: The slope of the demand curve depends on the fact as to whether the price of a commodity is expected to increase or decrease in the near future. When a consumer expects that the price of a commodity is to increase in the future, he starts demanding more of it at the current price. On the other hand, if he expects that price of the commodity is likely to decline in the near future, he does not buy at the current price and postpones his demand for the future. As a result of this, the demand curve rises upwards to the right.
  3. Snobbery: Many a time, a commodity is demanded not because of its intrinsic qualities but because of its being costly or scarce. There are many commodities which only rich people demand because it enhances their status. A decline in the price of such commodities reduces their status value and hence, their demand goes down. Rare and costly goods have snobbery appeal.
  4. Fashion: The demand for such goods, which are in fashion, does not decline even when their prices go up. On the other hand, if the fashion of a commodity disappears, a decline in its price shall not lead to an increase in its demand.
  5. Possibility of War: If in the near future, there is any possibility of a war breaking, the consumers start buying more of the commodity without caring for its current price because they know that during war days, goods of civilian consumption would not be available, or, if available, would bear a higher price.
  6. Ignorance: Sometimes people buy more of a commodity at higher prices. This is simply due to their ignorance.

In exceptional cases, stated above, the slope of the demand curve will not be negative.

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