Question

Why is the demand curve sloping downward and the supply curve sloping upward ?
What is the difference between change in quantity demanded and change in demand. Please high light the income effect and substitution effect: Give an example

Answer 1

1.

Demand curve slopes downward, because quantity demanded decreases with increase in price and vice versa. It happens due to the inverse relationship between the price and quantity demanded. When price increases, then the same quantity of output, consumes higher amount of income. As a result, consumers decrease the quantity demanded with increase in the price.

Supply curve is upward sloping, because quantity supplied, increases with increase in price. When price increases, then suppliers increase the supply to maximize the profit, because wages paid to the workers are sticky and prices or cost paid to the supplier are also sticky as per the contract. Further, the increase in price, causes decrease in real value of the wage and price paid to the workers and suppliers. As a result, producers increase supply with rise in price, making supply curve to be upward sloping.

2.

Change in quantity demanded is due to the price factor and change in demand is due to the non price factors such as income, substitutes and advertising. Further, change quantity demanded, causes movement along the demand curve. But, change in demand, causes rightward or leftward shift in the demand curve.

Here, substitution effects explains the ability to change the consumption with change in prices. For example, with decrease in price, consumption of a particular good, increases. It causes movements along the demand curve, realizing increase in quantity demanded with decrease in price.

Income effect explains the impact of the changing purchasing power on consumption of goods. For example, increase in income, causes demand curve to shift to the right and consumption increases even if the price remains same.