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Theory of consumer behaviour — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsTheory of consumer behaviour4 Marks
Question
Explain the inverse relationship between the price of a commodity and its quantity demanded.
OR
Why is the demand curve negatively sloped? Explain.
✓

Answer

When the price of a good falls it has following two effects that lead a consumer to buy more of that commodity.
  1. $\text{P}_\text{X}\downarrow\{\text{Real income(Y)}\uparrow\}\text{D}_\text{X}\uparrow$ and vice-versa.
Income effect: When the price of a commodity falls, the real income of the consumer, i.e., his purchasing power increases. As a result, he can now buy more of a commodity. This is called "income-effect". This causes increase in the quantity demanded of the good, whose price falls.
  1. $\text{P}_\text{X}\downarrow\{\text{Relative price}_\text{X}\downarrow\}\text{D}_\text{X}\uparrow$
Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than others. This induces the consumer to substitute the relatively cheaper commodity for the other good which is relatively expensive. This is called the "substitution effect”. This causes increase in quantity demanded of the commodity, whose price falls.
Thus, as a result of the combined operation of the income effect and substitution effect which are sub-effects of price-effect, the quantity demanded of a commodity increases with a fall in the price of the given commodity and vice-versa, provided other things remain the same.

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