Which of the following correctly states the three main reasons the demand curve is downward sloping?

• A. The substitution effect, the income effect, and diminishing marginal utility
• B. Rising consumer incomes, technological advancement, and price controls
• C. Increasing production costs, government intervention, and market competition
• D. Supply shortages, advertising, and consumer expectations

Answer: (A)

Verified step by step guidance

1. Understand that the demand curve shows the relationship between the price of a good and the quantity demanded, typically sloping downward from left to right.
2. Identify the three main reasons why the demand curve slopes downward: the substitution effect, the income effect, and diminishing marginal utility.
3. The substitution effect occurs because when the price of a good falls, consumers tend to substitute it for relatively more expensive alternatives, increasing quantity demanded.
4. The income effect means that a lower price increases consumers' real purchasing power, allowing them to buy more of the good, thus increasing quantity demanded.
5. Diminishing marginal utility explains that as consumers consume more units of a good, the additional satisfaction (utility) from each extra unit decreases, so they are only willing to buy more if the price decreases.