Question

Explain the causes behind law of demand.
OR

Why is there an inverse relationship between the price of a commodity and its quantity demanded?

Answer 1

The inverse relationship between price and quantity demanded can be explained by these causes:

1. Diminishing marginal utility: Successive units generally provide less additional satisfaction. Consumers will buy additional units only if their price falls.
2. Substitution effect: When the price of a good falls, it becomes relatively cheaper than its substitutes, so consumers switch towards it.
3. Income effect: A fall in price increases the consumer’s purchasing power (real income), enabling the consumer to buy more of the good.
4. Additional customers: A lower price allows consumers who could not previously afford the good to buy it; existing buyers may also buy more.
5. Different uses: When a multipurpose good becomes cheaper, it can be used for less essential purposes as well as important ones, increasing its demand.