Reasons for the occurrence of Law of demand:
(1) Income Effect: When the price of a commodity falls, a consumer has to spend less on the purchase of the same amount of the commodity. Thus, it increases his purchasing power or real income which inturn, enables him to purchase more of the commodity. Thus, the effect on demand for goods due to the change in the real income in the price of the commodity is known as the income effect. Therefore, income effect is related to change in income caused due to the change in price and not due to change in money income.
(2) Substitution Effect: Substitution effect means substitution of one commodity for other when it becomes relatively cheaper. If the price of one commodity rises, the consumer shifts to other commodity, which is a relatively cheaper. For example, tea and coffee may be termed as substitute to each other. If the price of coffee rises, the consumer may shift to tea thereby increase in demand of tea. This is called substitution effect.