Demand curve can be derived from the price consumption curve. Taking total money income on Y – axis and measuring quantity of goods X – axis, we draw budget lines showing how much can be purchased when price of X falls successively. The slope of these lines show the price per unit of X. successive points of equilibrium show the quantity of X bought at these prices. Plotting price and quantity denuded in a separate diagram, we can draw the demand curve. Slope pf the demand curve depends on the sum of substitution and income effects. In case of normal goods both these effects reinforce each other and quantity demanded goes up. For inferior goods, substitution effect is positive but income effect is negative. So there is a lower increase in demand. In case of Giffen goods, positive substitution effect is more than by the very strong negative income effect. So demand falls with a fall in price and the demand curve slopes upward.
Demand theory is criticized as being abstract and unrealistic. Everyone does not behave nationally. But the theory holds, when most of the people behave relationally at most of the times.SUBMIT ASSIGNMENT NOW!