The following points highlight the seven main reasons for the downward sloping demand curve.
1. The law of demand is based on the law of Diminishing Marginal Utility. According to this law, when a consumer buys more units of a commodity, the marginal utility of that commodity continues to decline. Therefore, the consumer will buy more units of that commodity only when its price falls.
When less units are available, utility will be high and the consumer will be prepared to pay more for the commodity. This proves that the demand will be more at a lower price and it will be less at a higher price. That is why the demand curve is downward sloping.
2. Every commodity has certain consumers but when its price falls, new consumers start consuming it, as a result demand increases. On the contrary, with the increase in the price of the product, many consumers will either reduce or stop its consumption and the demand will be reduced. Thus, due to the price effect when consumers consume more or less of the commodity, the demand curve slopes downward.
3. When the price of a commodity falls, the real income of the consumer increases because he has to spend less in order to buy the same quantity. On the contrary, with the rise in the price of the commodity, the real income of the consumer falls.
This is called the income effect. Under the influence of this effect, with the fall in the price of the commodity the consumer buys more of it and also spends a portion of the increased income in buying other commodities.
For instance, with the fall in the price of milk, he will buy more of it but at the same time, he will increase the demand for other commodities. On the other hand, with the increase in the price of milk he will reduce its demand. The income effect of a change in the price of an ordinary commodity being positive, the demand curve slopes downward.
4. The other effect of change of the price of the commodity is the substitution effect. With the fall in the price of a commodity, the prices of its substitutes remaining the same, consumers will buy more of this commodity rather than the substitutes.
As a result, its demand will increase. On the contrary, with the rise in the price of the commodity (under consideration) its demand will fall, given the prices of the substitutes. For instance, with the fall in the price of tea, the price of coffee being unchanged, the demand for tea will rise, and contrariwise, with the increase in the price of tea, its demand will fall.
5. There are persons in different income groups in every society but the majority is in low income group. The downward sloping demand curve depends upon this group. Ordinary people buy more when price falls and less when price rises. The rich do not have any effect on the demand curve because they are capable of buying the same quantity even at a higher price.
6. There are different uses of certain commodities and services that are responsible for the negative slope of the demand curve. With the increase in the price of such products, they will be used only for more important uses and their demand will fall. On the contrary, with the fall in price, they will be put to various uses and their demand will rise.
For instance, with the increase in the electricity charges, power will be used primarily for domestic lighting, but if the charges are reduced, people will use power for cooking, fans, heaters, etc.
7. There is a tendency to satisfy unsatisfied wants. Each person has some unsatisfied wants. When the price of a good such as apple falls, he wants to satisfy his unsatisfied wants which leads him to increase its demand. Because of this tendency of human beings, the demand curve slopes downwards to the right.