According to the law of demand, there is an inverse relationship between demand and price. It determines that the demand curve slopes downwards from left to right. The question arises why the demand curve slopes downwards or why the law of demand applies. Following are the reasons for it :
- Law of diminishing marginal utility: According to this law, the marginal utility from a given commodity falls as a consumer purchases more units of it. In equilibrium, there is an equality between marginal utility and price. It means purchasing more units of the commodity is associated with a lower price. Therefore, the inverse relation between demand and price is on account of the law of diminishing utility. It is precise because of this relation that the demand curve slopes downwards from left to right.
- Desire to buy: When the price of a commodity falls, the consumer feels that his real income has increased. In such a situation, his desire to buy naturally becomes more intense and he starts purchasing more units of the cheaper commodity.
- Capacity to buy: As the price of a commodity falls, the consumer finds that his capacity to purchase has increased. Suppose a consumer has Rs.800 and the price of apples is Rs.40 per kg. He can buy 20 kgs of apples in this amount. If the price of apples falls to Rs.32 per kg, the consumer can buy 20 kgs of apples by spending Rs.640 and there is a surplus amount of Rs.160 left with him. It signifies that the consumer can buy assertional 5 kgs of apples. In such a situation, the consumer starts buying a larger quantity of commodities and the law of demand becomes valid. As a result the demand curve slopes negatively.
- Substitution: When the price of a commodity falls, it becomes cheaper relative to other commodities. The consumer substitutes cheaper goods in place of costly goods. So more quantity of the commodity is bought at its lower price and the demand curve slopes downwards from left to right.
- Alternative uses: A commodity may be put to several uses when it becomes cheaper and cheaper. It is likely to be put to more uses and its larger quantity is bought. For instance, coal can be used in factories, railways, power plants, and houses. If the price of coal is high, it may be used by railways and power plants. If there is a further fall in its price, the households may also start using it as fuel. Thus with a fall in price, the demand for this commodity expands and the demand curve slopes downwards from left to right.
- New consumers: When the price of a commodity falls, on the one hand, existing consumers start buying more units of the commodity, and on the other, new consumers get interested in its purchase. For instance, if the price of mango is Rs.40 per kg, many consumers who could not earlier afford to buy, feel that it is now within their reach and they too start buying mangoes. This results in an expansion in its demand at the lower price and the downward slope of the demand curve.