Why Demand Curves Slope downward!

I have mentioned in my earlier discussion that demand expresses one distinct human nature - and that is "preference". A list showing different combinations of commodities preferred where satisfaction everywhere is maintained is depicted graphically in an indifference curve.

However, although indifference curve frontiers describe certain utility levels, each has not described as to whether each combination in the preference curve is affordable. A different function describing different combinations of goods that can be bought given a definite level of income is called a budget line. Combining the two scenarios of maximum benefit given income will arrive at identifying the optimum. The optimum level or is called the consumer equilibrium is defined as the maximum satisfaction reachable within the indifference curve that is purchasable with the given budget.

Now with changes in either in income and prices, the budget line will either shift or rotate. Such will move the indifference curve either positive or negative. Substitution effect or income effect can take place. The optimum condition finally attained after the changes will again define the change in optimum satisfaction enjoyed.

The change in quantity demanded of certain commodities as a result of a change in prices or in income will lead to the derivation of demand function.

Concepts to look at:

1. normal good
2. inferior good
3. giffen good
4. substitution effect
5. income effect
6. diminishing marginal utility