Demand curve is downward sloping because there is an inverse relationship between price and quantity demanded. It means that when price of the good rises, demand for the good reduces and when price of the good reduces demand, for the good increases.
1. That is because there is an inverse relationship between quantity demanded and price. In other words, when prices go up, the demand for the products or services reduce. Finally, the prices go down because of the low demand, the demand goes.
2. Several things can influence the demand besides the price. Such as acquisitive power of the clients changing, consumer preference, fashion (as in, maybe your product is not so cool anymore), competition (somebody is doing the same for a lower cost to the clients?) and so on.
3. When the acquisitive power is changed, usually, the behavior of the consumer changes as well. A decrease in prices means more purchasing power to the customer, which usually results in the costumer buying more expensive goods instead. Which is the substitution effect.
On the other hand, once prices goes up, consumers don't usually go for a substitute if they feel like what they want to buy is expensive now. They most likely will keep buying that service or product, but in lesser quantities. That's the income effect.
The income effect is basically a change on someone's consuming pattern because of a change on prices or income.
The substitution effect tends to happen when the general prices go up or the customer has to deal with a lower income, making him or her buy less expensive products in order to maintain the lifestyle. Slight increase of the income may also make the consumer buy slightly more expensive products of better quality.
Changes in purchasing power can result from income changes, price changes or currency fluctuations. Price decreases increase purchasing power, allowing a consumer to buy a better product or more of the same product for the same price. However, different goods and services experience these changes in different ways.
