Why is the inverse relationship between price and quantity demanded?
The reasons for why
there is an inverse relationship between price and quantity demanded or for
demand curve being downward sloping are as follows.
a) Consistency with common sense: Price is an obstacle that deters consumers from buying. The higher that
obstacle, the less of a product they will buy; the lower the price obstacle,
the more they will buy.
b) Diminishing marginal utility: Consumption is subject to diminishing marginal utility. And because
successive units of a particular product yield less and less marginal utility,
consumers will buy additional units only if the price of those units is
progressively reduced.
c) Income effect: The income
effect indicates that a lower price increases the purchasing power of a buyer’s
money income, enabling the buyer to purchase more of the product than she or he
could buy before. A higher price has the opposite effect.
d) Substitution effect: The substitution effect suggests that at a lower price buyers have the
incentive to substitute what is now a less expensive product for similar
products are now relatively more expensive.