The demand curve in Fig. 2.

1 has only two dimensions: quantity demanded (on the horizontal

axis) and price (on the vertical axis). The demand curve slopes downwards from left to right
exhibiting the negative or inverse relationship between the price of commodity A and the
quantity of demanded of commodity A. This important property is called the law of demand.
Thus, the law of demand states that the higher the price, ceteris paribus, the lower the quantity
demanded and the vice-versa.
The functional relationship between quantity demanded and price can be represented in the
equation form, i.e Qd=a-bP where Qd is quantity demanded, a and b are constants and a is the
intercept, b is the slope and P is the price of the product.

There are four plausible explanations as to why a consumer buys more of a commodity when its
price falls and less of the commodity when its price rises. In other words, the rationale behind the
downward sloping demand curve is fourfold:

a) Common Sense: From a common sense or simple observation, price acts as an obstacle,
which deters buyers from purchasing more and more of a commodity?
The higher this price obstacle, the less the product consumers buy and the lower the price
obstacle, the more the product people buy as low price encourages them to purchase more and
more. By lowering prices, business firms reduce their inventories than by raising them.

b) Diminishing Marginal Utility: We consume a basket of goods and services because

they give us utility a measure of happiness or pleasure.
But, consuming successive units of a particular product yields less and less extra utility and
hence consumers will only buy additional units if prices are lowered.

c) Income effect: A reduction in the price of a commodity would increase the purchasing
power of a consumers money income.
In other words, at a lower price, the purchasing power of a consumers money income grows
enabling him/her to buy more of the commodity without sacrificing other goods. For example, a
decline in the price of edible oil generally increases the purchasing power of a consumer's money
income enabling the consumer to buy more edible oil without giving up other goods. Hence, the
increase in quantity demanded of a commodity on account of the increase in the purchasing
power of the consumers money income resulting from a price fall is known as the income effect.
An increase in the price of the commodity would have the opposite effect.
Substitution effect: if the price of a commodity falls while the price of its substitute is