What is substitution effect

Why demand of CNG increases as price of petrol increases?

Answer :

The change in quantity demanded of a commodity resulting from a change in its relative price is known as Substitution effect. It reflects the tendency of people to substitute in favour of cheaper commodities and away from more expensive commodities.

As the price of petrol increases with the price of CNG remaining the same, CNG will become relatively cheaper.CNG becomes more attractive to people in comparison with petrol (both satisfy the same type of demand and hence can be used in place of one another).Consumers will normally like to shift from the consumption of petrol to CNG.

Law of Demand

The law of demand states that other thing remaining equal, the quantity demanded of a commodity increases when its price falls and decreases when its price rises.

The law indicates an inverse relationship between the price and quantity demanded of a commodity.

The law of demand is based on the following main assumptions:

1) There should be no change in income of the consumer.

2) There should be no change in tastes and preferences of the consumers.

3) Prices of the related commodities should remain unchanged.

4) Size of the population should not change.

5) The distribution of income should not change.

6) The commodity should be a normal commodity.

Explanation of law of demand/Why demand curve slope downwards to the right/why demand curve has a negative slope

1) Law of diminishing marginal utility : 

This law states that as consumption of a commodity increases, the utility from each successive unit goes on diminishing. So for every additional unit to be purchase the consumer is willing to pay less and less price.
Thus more is purchase only when own price of the commodity falls.

Explanation through example:

Units of shirt	Marginal utility
1 2 3 4 5	700 650 600 500 350