Price has an inverse relationship with demand leads the demand curve to slope downwards. The demand and supply curves are graphical expressions of the behaviors of a market following individual demands.
The managers use the demand graph to measure demand schedules and future consumption patterns in a competitive market. When they intersect the demand graph with a supply graph, they find equilibrium price on which equilibrium supply can maximize the profits. We know consumers are ready to pay equilibrium price for equilibrium supply which can be produced without any surplus or shortage.
The obvious reason behind demand graph sloping downward is an inverse relationship between demand and price. The price is displayed at Y-axis and demand at X-axis. When we draw a demand graph, we show that consumers purchase more on a decrease in price, less on the increase. Besides this underlying assumption, the economists agree on some other reasons as well which forces the demand curve to slope downwards including income effect, substitution effect, number of consumers, the law of diminishing marginal utility and multiple uses of goods.
With a decrease in the price of a product, the consumers can purchase more goods. Whatever money he saves from the purchase of that particular good is considered an increase in his real income. This adds up to his purchasing power as well. Now he can buy more quantity of the same product or allocate than he was used to doing previously. When the price of a product increases, the real income of the consumer's decreases and they will purchase less of its less quantity. This phenomenon is called income effect, and when we put it in graphical expression, we find demand curve slopping downwards. J.R. Hicks and Allen support this point of view.
When the price of a product decreases, the consumers shift their resources to this product. This results in less consumption of the price substitutes. This phenomenon is called a substitution effect. J.R. Hicks, Allen, and other modern economists take substitution effect as one of the reasons behind demand curve slopping downwards.
When the price of a product goes down the number of consumers of that product rises. Similarly, when the price of a product goes up, the consumers shift towards cheaper substitutes. The number of consumers impacts the demand graph and make curve slope downwards.
Consumption of products provides satisfaction. However, this satisfaction or utility decreases with every next unit of the item to be consumed. It is called the law of diminishing marginal utility.
To simplify the idea suppose you are fasting. In the evening when you take the first sip of water it is the most satisfying. However, every next sip loses its utility, and after taking a couple of glasses of water, you no more need water. Eventually, the utility falls to zero.
Talking in terms of price, if you have to pay from 1-10 dollars for every sip of water as a unit you will be ready to pay $10.00 for the first sip. However, as you continue drinking more water, a time will come when you will not be ready to pay a single penny for the next sip. The utility of water diminishes with every sip.
Due to the phenomenon of the law of diminishing marginal utility, the demand curve slopes downwards.
Some economists suggest that if a product has many uses and its price falls, the consumers shall continue to purchase more of that product for other purposes besides the basic one. It has been observed that when a subsidy is offered on flour in Pakistan, the consumers continue purchasing it their basic needs are satisfied. They are buying it to replace a bit costlier fodder for animals. This kind of attitude shows that when price decreases, the people purchase more of that product not only for their own consumption but also for other uses.
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When price increases demand decreases the law is not right in all times in pres condition Not rated yet
When consumer purchase a car like OD CARS. .they have the ability to maintain the car When the price of fuel increases the demand of car decrease …
Oct 07, 19 02:55 PM
Running of companies without any management rules seems a far-fetched idea. However, recent experiments show that if properly executed, it can end management era.
Oct 07, 19 02:47 PM
Profit maximization is the goal of every financial manager for a company. Go through a few key points for profit maximization.
Jul 30, 19 03:50 PM
The Pythagorean Theorem related the side length of the three sides of a right angled triangle (c^2 = b^2 + a^2). What you describe above is nothing to