Question
Explain the inverse relationship between price and quantity demanded of a commodity.OR
Why is the demand curve of the commodity negatively sloped?
Why is the demand curve of the commodity negatively sloped?
✓
Answer
Downward slope of demand curve indicates that more is purchased in response to fall in price and vice-versa. Thus, there is inverse relationship between own price of a commodity and its quantity demanded.This is attributed to the following factors:
- Law of Diminishing Marginal Utility: According to this law, as the consumption of a commodity increases, the utility from each successive unit goes on diminishing. Accordingly, for every additional unit to be purchased, the consumer is willing to pay less price.
- Income Effect: Change in the own price of a commodity causes a change in real income of the consumer. With a fall in price, real income increases. Accordingly, demand for the commodity expands and vice-versa.
- Substitution Effect: It refers to the substitution of one commodity for the other when it becomes relatively cheaper due to change in relative prices.
- Size of Consumer Group: When price of a commodity falls, it attracts new buyers who can now afford to buy it, hence quantity demanded rises.
- Different Uses: Many goods have alternative uses, e.g. milk is used for making curd, cheese and butter. If price of milk reduces, it will be put to different uses. Accordingly, demand for milk expands.
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→OR
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