Explain the causes behind law of demand.  
Why is there inverse relationship between price of the commodity and its demand? 

 According to Classical approach, the most important reason behind law of demand is 'law of diminishing marginal utility' but the modem economists believe income effect and substitution effect as the main causes. These are explained below:

1.    Law of diminishing marginal utility. Briefly, this law states that when a consumer consumes more and more units of a commodity, marginal utility derived from successive units goes on decreasing. As for example, a hungry man gets maximum utility from first chapati, lesser utility from second chapati, still lesser from third chapati and so on. Demand depends on utility or usefulness of a commodity to the consumer, i.e., if he gets more satisfaction, he will pay more and if he gets less utility, he will buy at a lower price. Since additional (or successive) units give him lesser utility, he will buy additional units only at lower price. And this is Law of Demand which states that demand for a commodity is more at a lower price and less at a higher price. Thus law of diminishing marginal utility explains the downward slope of demand curve. Indeed demand curve is essentially the downward sloping portion of the marginal utility curve.

2.    Income effect. A change in quantity demanded as a result of change in real income caused by change in price of a commodity is called income effect. Any change in the price of a commodity affects the purchasing power or real income of the consumer although his money income remains the same. When price of a commodity falls, less has to be spent on purchase of same quantity of that commodity or same quantity can be purchased with less money. With money thus saved, a consumer can purchase more quantity of the commodity whose price has fallen. This is called income effect of change in price of the commodity.

In short, a fall in price increases the real income (purchasing power) of a consumer with the result that he buys more quantity with the same money income. Similarly, a rise in price virtually amounts to fall in real income of the consumer leading to contraction of his demand. This part of increase in demand is called income effect. Mind, income effect is related to change in income caused due to change in price and not due to change in money income.

3.    Substitution effect. Substituting a cheaper commodity for the relatively expensive commodity is called substitution effect., Alternatively, it refers to substitution of one commodity in place of other commodity when it becomes relatively cheaper. How? A rise in the price of a commodity, say coffee, also means that price of its substitute, say tea, has fallen in relation to that of coffee even though price of tea remains unchanged. So people are induced to buy more of tea and less of coffee when price of coffee rises. In other words, consumers will substitute tea for coffee. This part of increase in demand is called substitution effect.

The effect operates reverse when the price of the commodity falls. A fall in the price of a commodity induces the consumer to substitute other commodities with this commodity whose price has fallen. This leads to rise in demand. Clearly substitution effect is based on concept of relative prices of substitute goods.

Thus, according to modern economists, the combined operation of income effect and substitution effect causes increase in demand with a fall in price.

It may be noted that the combined effect of income effect and substitution effect is called price effect.

Why inverse relationship between price and demand? We have read in Utility Approach of consumer's equilibrium that a consumer buys only that much of a commodity at which its marginal utility in money terms is equal to its price. Under such a situation suppose price falls, it makes marginal utility greater than price. This induces the consumer to buy more of the commodity. Clearly it shows inverse relationship between price and demand.