Demand Curves Flashcards
why does the individual demand curve slope downwards?
the law of demand is based on the law of diminishing marginal utility, when a consumer buys more units of a commodity the utility of that product becomes less and less. therefore the consumer will only accept to keep paying for that commodity if the price decreases or when quality increases. when fewer units are available utility will be high and consumers will be more prepared to pay more for the commodity, therefore higher demand at a high price less at lower causing the demand curve to slope downwards.
Explain the income effect.
when the price of a commodity decreases, the RDI of that consumer increases because he would have spent less on that essential product meaning he has more RDI. Meaning when the price of the commodity increases his RDI will decrease. The income effect causes people to buy more or less of other products depending on whether there RDI increases of decreases.
Why does the market demand curve slope downwards?
every commodity has certain consumers but when its price falls new consumers start wanting it , therefore demand will increase. However when the price of a commodity increases many customers will either reduce or stop it’s consumption and demnad will fall. e.g. in the case of toilet paper , if the price of andrex 12 pack decreased consumers who have never seriously looked at it before may be more attracted to it .
Explain the substituion effect.
if one item falls in price and all of its substitutes remain the same the demand for that commodity will increase rather than the substitutes. e.g. if tea decreases in price people will buy more tea and less coffee if coffee stays the same price.
