Question

Why is the marshallian demand curve downward sloping, explain in terms of the substitution and income effects.

Answer 1

A Marshallian demand curve is downward sloping due to three seasons, they are diminishing marginal utility, income effect and the substitution effect:

Income effect. As per the income effect as the price of the good decrease the demand for the goods rises. When the price gets lower people feels richer than before i.e. they have some income left with them even after pending for the goods they want and they spend that extra income to create more demand. It makes the demand curve expand when the price decrease. This is known as income effect.

Substitution effect: When the price of the good decrease people choose cheaper goods in comparison to their costlier substitute, and at a lower price they switch to the goods which have lower price. The lower the price goes the more people demand that good. It makes the curve downward sloping. It is known as substitution effect.