The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded over a specific period. Typically, price is represented on the left vertical axis, while the quantity demanded is depicted on the horizontal axis.
A demand curve varies for different products and services. Normally, when the price rises, the demand falls, reflecting the price elasticity of demand—a measure of how consumption of a product responds to price changes. Analyzing the elasticity of demand helps us understand the varying impacts on different products.
Key Takeaways
- A demand curve graphically depicts the relationship between a good’s or service’s price and the quantity demanded within a set period.
- It helps to grasp the price-quantity relationship in specific markets, like corn or soybeans.
- Due to the law of demand, the demand curve generally slopes down from left to right, indicating a drop in quantity demanded as price rises for most goods.
- Factors other than price and quantity shifts can move the demand curve horizontally to the right or left.
- Some exceptions like Giffen goods and Veblen goods defy this typical price-demand relationship.
Understanding the Demand Curve
The demand curve is crucial for understanding how prices and the total quantity of demanded goods and services interrelate over time. This curve generally slopes downward from left to right, representing the law of demand—higher prices typically result in lesser quantities demanded.
Notably, price is an independent variable, while quantity demanded is dependent. Although most disciplines place the independent variable on the horizontal axis, economics makes an exception here.
For instance, if the price of corn increases, consumers might buy less and resort to alternatives, reducing the total quantity of corn demanded.
Types of Demand Curve
Here are two main types of demand curves:
Individual Demand Curve
An individual demand curve represents the price-quantity relationship for a single consumer.
Example: Imagine Joel buys four slices of pizza daily at $1.50 each for lunch (total $30 a week). If the price drops to $1 a slice, Joel may choose to buy six slices instead. When plotted, this information creates Joel’s individual demand curve.
Market Demand Curve
The market demand curve aggregates all individual demand curves in a specific market. It displays the quantity of a good demanded by all consumers at various price points. Rather than consumer desires, it shows the goods all consumers will buy at different prices within their purchasing power. Market demand curves are typically flatter because market demand changes in smaller proportions relative to price changes than individual demand curves.
Businesses leverage market demand curves to align their pricing with consumer demand.
Demand Elasticity
The relationship between rising prices and falling demand is termed demand elasticity or price elasticity of demand. Elastic goods, like luxuries and consumer discretionary items, see significant changes in demand with price shifts, while inelastic goods, like necessities, remain relatively unaffected by pricing changes.
Elastic Demand Curve
Elastic demand curves are shallow (close to the horizontal axis). For instance, a price rise for a specific candy bar might result in significant drop in its demand due to the availability of substitutes.
Inelastic Demand Curve
Inelastic demand curves are steep (close to the vertical axis). Necessities like prescription medicines or utilities do not show significant demand changes even if prices rise.
Factors That Shift the Demand Curve
Factors beyond price and quantity can shift the demand curve either rightward or leftward.
Examples of shift causes include:
- Population growth increases demand at unchanged prices, shifting the curve right (D2).
- Market preferences shifting towards another substitute than corn moves the curve left (D3).
- Reduced consumer incomes lead to buying less, shifting the curve left (D3).
- Rise in substitute prices makes corn more appealing, shifting the curve right (D2).
- Increased prices of complementary items (e.g., charcoal for grilling corn) shift the curve left (D3).
- Anticipation of higher future prices may temporarily shift the curve right (D2).
Exceptions to the Demand Curve
Some products like Giffen goods and Veblen goods have an upward-sloping demand curve, defying standard rules.
Giffen Goods
A Giffen good increases in demand when prices rise, often due to lack of viable substitutions.
Veblen Goods
These are luxury items that see a rise in demand with rising prices due to their prestige value.
What Is the Law of Demand?
The law of demand asserts an inverse relationship between product price and quantity demanded—the higher the price, the lower the demand. It, combined with the law of supply, governs resource allocation and pricing in market economies.
Difference Between Demand Curve and Supply Curve
A demand curve shows the price and quantity demanded relationship, typically sloping downward. Conversely, a supply curve demonstrates the relationship between price and quantity supplied, generally sloping upward.
Demand Curve Orientation
Though demand curves usually slope downward, exceptions like Giffen and Veblen goods show an upward slope.
The Bottom Line
A demand curve graphically illustrates how a good’s demand changes with its price over time. It’s a valuable tool for businesses to identify profitable pricing to meet consumer demands.
Related Terms: supply curve, law of demand, price elasticity of demand.
References
- University of Minnesota. “3.3 Demand, Supply, and Equilibrium”.
- Iowa State University. “Elasticity of Demand”.
- Iowa University, Extension and Outreach. “Elasticity of Demand”.
- U.S. Bureau of Labor Statistics. “Veblen Goods and Urban Distinction: The Economic Geography of Conspicuous Consumption, A Survey of 21 Cities”. Page 3.
