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    Question

    Due to which of the following reasons the demand curve

    slopes downwards?
    A Income Effect Correct Answer Incorrect Answer
    B Law of Diminishing Marginal Utility Correct Answer Incorrect Answer
    C Arrival of new consumers Correct Answer Incorrect Answer
    D Substitution effect Correct Answer Incorrect Answer
    E All of the Above Correct Answer Incorrect Answer

    Solution

    The demand curve slope downwards because of the following reasons:

    • Law of Diminishing Marginal Utility : People will buy more quantity at lower price because they want to equalize the marginal utility of the commodity and its price. So a rational consumer will not pay more for lesser satisfaction. He is induced to buy additional units in order to maximize his satisfaction or utility.
    • Substitution Effect: When the price of a commodity falls, it becomes relatively cheaper than other commodities. It induces consumers to substitute the commodity whose price has fallen for other commodities which have now become relatively expensive. The result is that the total demand for the commodity whose price has fallen increases.
    • Income Effect : When the price of a commodity falls, the consumer can buy the same quantity of the commodity with lesser money or he can buy more of the same commodity with the same amount of money. This is called the income effect. Due to the operation of income effect and substitution effect the law of demand holds.
    • Arrival of New Consumers : When the price of a commodity falls, more consumers start buying it. This raises the number of consumers of a commodity at a lower price and hence the demand for the commodity.
    • Different Usage : If some commodities have multiple usage and their prices fall, they will be used for varied purposes and their demand will increase. Whereas an increase in prices will limit their usage.

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