The rationale for the downward sloping demand curve for a single product is different from the rationale for the downward sloping aggregate demand curve.
For the demand curve for a single product, the income and substitution effects come into play. The consumer’s real income rises when the price of an individual product falls, because the consumer’s nominal income can be used to buy more of this product. This is the income effect. The substitution effect occurs when the consumer substitutes some of the now lower-priced product because it is relatively less expensive.
These explanations do not work for the aggregate demand curve.
For one thing, when prices fall – when consumers pay less for goods and services – less nominal income flows to owners of resources in the form of wages, rent, interest, and profits. So a falling price level does not necessarily translate into an increase in nominal income for the economy as a whole.
Further, the substitution effect is not applicable. In general, all prices are falling, so there is no place for the consumer to substitute now cheaper priced goods and services. There is no overall substitution effect among domestically produced goods when the general level of prices falls.
If these conventional reasons for the downward sloping demand curve do not work as explanations for the downward sloping aggregate demand curve, then why is the aggregate demand curve downward sloping?