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Question
Briefly explain any two reasons for the occurrence of the law of demand.
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Solution
- Law of Diminishing Marginal Utility: Law of diminishing marginal utility states that as a consumer consumes more and more units of a commodity, the utility derived from each successive unit goes on decreasing. So the demand for a commodity depends on its utility. If the consumer gets more satisfaction, he will pay more. As a result, the consumer will not be prepared to pay the same price for additional units of the commodity. The consumer will buy more units of the commodity only when the price falls.
- Income Effect: Income effect refers to an effect on demand when the real income of the consumer changes due to the change in the price of the given commodity. When the price of the given commodity falls, the purchasing power (real income) of the consumer increases. As a result, he can purchase more of the given commodity with the same money income.
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