Final answer:
The demand curve is downward-sloping due to the income and substitution effects, which explain changes in consumer purchasing behavior due to shifts in price and the relative cost of goods. The substitution effect often complements a negative income effect for normal goods, reinforcing the overall downward slope of the demand curve in microeconomic models.
Step-by-step explanation:
The income and substitution effects are influential factors in consumer choice theory that help explain why the demand curve is downward-sloping. The substitution effect occurs when consumers opt for a relatively cheaper substitute when the price of a good increases, which tends to increase the quantity demanded of the cheaper good and decrease the quantity demanded of the more expensive one. Conversely, the income effect reflects the change in consumption due to the impact on a consumer's purchasing power when prices change. As prices rise, real income falls, leading consumers to buy less of a normal good.
With normal goods, the negative income effect signifies that less is consumed of each good. The substitution effect generally reinforces the income effect for normal goods, leading to a downward-sloping demand curve. When analyzing labor supply, if the substitution effect (the desire to substitute leisure for labor when wages increase) is larger than the income effect (the tendency to work less when income increases because there is less need to work for additional income), the labor supply curve will have an upward-sloping shape. However, this isn't directly related to the shape of the demand curve.
It is important to differentiate these microeconomic concepts from macroeconomic models, where the reasons behind the shapes of aggregate supply (AS) and aggregate demand (AD) curves differ. For individual goods and services, the demand curve's downward slope is driven mostly by the availability of substitute goods, unlike in macroeconomic contexts where other factors such as wealth effects, interest rates, and foreign prices come into play.