Economics
Why?
Why Demand Curves Slope Downward
Why do people buy more when prices fall?
Quick check · tap an answer to continue
Lesson notes
Key points
- Because a lower price lets your fixed income buy more of everything, which is called the income effect.
- Because the cheaper good also becomes cheaper relative to substitutes, buyers switch toward it, which is the substitution effect.
- Because diminishing marginal utility means each extra unit is worth less to you, you only buy more if the price drops.
Definitions
- Income effect
- Change in quantity demanded caused by the change in real purchasing power when a price changes
Takeaway: So demand slopes downward: lower price, higher quantity demanded.
Quick check: What effect describes buyers switching to a good that became relatively cheaper?
- Income effect
- Substitution effect
- Wealth effect
Relative price changes push buyers toward the cheaper substitute.
Income effectSubstitution effectMarginal utility
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