Circumstances in which Demand Curve Slopes Upward

Demand Curve Slopes Upward Circumstances

Demand curve slope downward to right

It is also known as the negative slope of the demand curve. Downward slope of a demand curve indicates and P inverse relationship between the price and quantity demanded. Downward slope of the demand curve implies that the quantity demanded rises as the price falls. This is precisely what the law of demand states.

Economists have developed two approaches to answer this questions viz. (1) Traditional approach and (2) modern approach.

Traditional approach

It is based upon the utility analysis. The following factors are responsible for the operation of the law of demand, or for the downward slope of demand curves.

1. The law of diminishing marginal utility-

   According to this law, as a consumer has more of a commodity; the utility derived from the successive units goes on decreasing. A consumer will continue consuming a commodity until the marginal utility of the commodity becomes equal to its price. This is the equilibrium position of the consumer which can be stated as follows-

Marginal utility of commodity X= Price of X

This can be explained through a marginal utility curve, as given in fig. point M shows the original equilibrium of the consumer where he buys OQ quantity at OP price. At this point, price OP is equal to the marginal utility MQ. Now suppose the price decreases to OP1. In order to restore equilibrium the consumer now buys OQ1 quantity so that new price OP, equals the marginal utility MIQI. In other words a larger quantity is demanded at a lower price, and vice versa.

2. Change in the number of consumers-

   Suppose the price of apples falls from Rs. 40 per Kg. to Rs. 20 per Kg. Many households who could not afford to buy apples at a higher price now find it within their means to buy apples when its price comes down to Rs. 20 per Kg. The new buyers and old buyers together push up the demand for apples at a low price.

3. Diverse uses of a commodity-

   There are commodities that can be put to more than one use. For example, electricity could be used for lighting, cooking, heating, cooling etc. Suppose, the price of electricity rises from Rs. 2 per unit to Rs. 4 per unit, its consumption will be restricted only for lighting purpose or cooking food. As a result, the total consumption of electricity or total demand for electricity will decrease.

Modern Approach

According to the modern theory of demand the effect of a price change on quantity demanded can be segregated into two effects i.e. (i) Income effect, and (ii) Substitution effect.

1. Income effect-

   Any change in the price of a commodity affects the purchasing power (real income) of a household. A fall in the price causes an increase in the real income of the household, and vice versa.

2. Substitution effect-

   When the price of a commodity raises the relative prices of its substitutes automatically decline, or in other words, its substitutes become cheaper.

Conditions in which demand curve slopes upwards

Under certain conditions the inverse relationship between price and demand does not hold goods. These are known as the exceptions to the law of demand.

Some of the important exceptions to the law of demand are as follows:

1. Giffen Goods- Giffen goods are a special type of inferior goods, The goods are named after the economist, Sir Robert Giffen, A rise in the price of Giffen goods leads to a rise in their demand and vice-versa. Take the case of a poor household which spends a major portion of its money income on an inferior good like coarse grains, say bajra. If the price of bajra goes up, this household will be forced to maintain the earlier level of consumption of this good. It would be left with lesser income to spend on other commodities that it used to consume earlier. A fall in the price of bajra will enable the household to release more money for other commodities and he may substitute consumption of bajra by the consumption of other superior-commodities.
2. Conspicuous necessities- Another exception occurs in case of such commodities as through their constant use because of fashion or prestige value attached to them, have become necessities of life. For example, in spite of the fact that the prices of television sets, refrigerators, cooking gas, scooters, etc. have been continuously rising, their demand does not show any tendency to fall.
3. Conspicuous consumption- A few goods like diamond, etc. are purchased by rich ‘wealthy persons of the society because the prices of these goods are so high that they are beyond the reach of the common man. More of these commodities are demanded when their prices go up very high.
4. Future changes in price- Households also act as speculators. When the prices are rising, households tend to buy larger quantities of the commodity out of the apprehension that prices may go up further; likewise, when prices are expected to fall further, a reduced price may not be a sufficient incentive to induce households to buy more.
5. Emergencies- Emergencies like war, famine; floods etc. negate the operation of the law of demand. At such times, households behave in an abnormal way. Households accentuate scarcity and induce further price rises by making increased purchases even at higher prices during such periods.
6. Change in fashion- A change in fashion and tastes affects demand for a commodity.
7. Ignorance- Consumer’s ignorance is another factor that at times induces him to buy more of a commodity at a higher price. This is especially true when the consumer is haunted by the phobia that a high-priced commodity is better in quality than low-priced commodity.

Important links

• Role and Responsibilities of Business Economist
• Operation of Law of Diminishing Marginal Utility- Causes, Exception
• Law of Diminishing Marginal Utility
• Significance of Business Economics in Decision Making
• Demand and Demand Curve- Explanation & Exception

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