What is Demand Curve?
The demand curve illustrates how the price of a commodity or service affects the demand for that particular product. According to a demand curve, the price of a good or service changes along with how much people are willing to buy.
The decrease in the price of goods and services will increase its demand. Due to this, Black Friday or Diwali looks crazy at stores: retailers cut prices to make sure they'll be "in the black" for the year while shoppers load up on Christmas presents.
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Demand Curve Graph
A graph shows the horizontal axis indicating the quantity demanded and the vertical axis representing the price. The demand curve for each good or service is different, but they all operate the same way. When prices of goods increase, the demand for the goods will tend to decline and vice versa.
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The chart illustrates standard price-quantity relationships. When the price is lower, the quantity demanded increases. Prices decrease from p0 to p1, while quantities increase from q0 to q1.
Demand Curve and Market Demand Curve
Summarizing all the individual market demand curves, we get the market demand curve. It illustrates the number of goods demanded by individuals at different price points. According to the market demand curve, every price point is associated with the quantity demanded by everyone on the market. Because the quantity demanded decreases as the price increases, the market demand curve is typically downward sloping. By analyzing the market demand curve, we can figure out how much all consumers demand a particular good in a particular market. It can also be presented as a table-based schedule. The given picture makes it clear to understand the difference between the demand curve and the market demand curve.
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Need of Demand Curve in Economics
When businesses make pricing decisions, the demand curve can be a vital tool. Demand curves can help us identify price points where consumers have dropped responsiveness and price points where demand has increased. These two factors allow a company to price its products to profit while retaining high customer demand.
Furthermore, a business can use the demand curve to determine which price points to sell at and which price points to avoid so that consumer demand decreases. This information can enable businesses to make pricing decisions that balance earning decent profits and keeping their products in demand.
Slope of Demand Curve
As a measure of steepness, a line's slope is used. It is calculated by dividing the increase in the vertical coordinates by the increase in the horizontal coordinates. The line shows how much it rises or falls by moving to the right. According to the slope of demand curve, the amount it moves upwards or downwards is determined by its steepness. According to W. J. Baumol, "The slope of a line is a measure of steepness". The slope represents the ratio between price and demand changes (both variables).
Types of Demand Curve
Prices and levels of demand for different goods are correlated differently. Therefore, demand elasticity varies among goods. There are two types of demand curves:
Elastic Demand
With elastic demand, a price decrease leads to a significant increase in quantities purchased (and vice versa). A little price change can cause a much significant change in the quantity demanded.
A good demand curve example would be onions; if you know you're going to use them eventually and can store the extra, you may buy three times as much as you normally would. If the demand is perfectly elastic, the curve will look almost horizontal flat line.
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Inelastic Demand
A price decrease will not increase quantities purchased in an inelastic demand situation. Take bananas as an example. Despite their low prices, there is only so much you can eat before they spoil. A 25% price drop won't convince you to buy three bunches. Almost like a vertical straight line, the demand curve looks inelastic if it is perfectly inelastic.
As long as you can store onions, you can benefit from the third package as much as the first. This is due to their high marginal utility. The marginal utility of onions is higher than that of bananas; therefore, you react more strongly to onion sales. When bananas are kept for long periods, even in the freezer, they lose their consistency, so they are of limited use.
Law of Demand
If all else is equal, this relationship follows the law of demand, which states that the quantity demanded decreases as the price rises. If the four factors that determine demand don't change, the quantity and price of the commodity will follow the demand curve. These factors are:
The price of related products or services
Buyer's income
Consumer preferences
Consumer expectations (particularly about future prices)
The entire demand curve shifts if even one of these four determinants changes because a new demand schedule will be created to show the new relationship between quantity and price.
Demand Curve Exceptions
Demand will generally show a downward slope for everyday goods, but there are some exceptions, they are explained below:
Giffen Goods:
Giffen goods are extreme cases of inferior goods. Giffen goods have the characteristic that demand increases as price increases. However, there has not been a true instance of a Giffen good in the real world. Still, a historical example of a Giffen good includes purchasing potatoes (an inferior good) during the Irish Potato Famine, when prices continued to rise.
Veblen Goods:
Some items are used as status symbols to display wealth, such as diamonds, expensive cars, designer clothing, and other high-priced limited items. As commodities become more expensive, their status symbols value increases, which increases their demand. As their price increases, the amount demanded of these commodities increases, and as it decreases, the amount demanded decreases. Such commodities are known as Veblen goods.
In general, people will buy more goods and services at lower prices than at higher prices. Graphing this relationship results in a demand curve. Hence, the article has covered all about the demand curve that can help you understand the concept thoroughly.
FAQs on Demand Curve
1. What is a demand curve?
A demand curve is a graphical representation showing the relationship between the price of a good and the quantity demanded by consumers at various price levels, assuming all other factors are constant (ceteris paribus). It is plotted with price on the vertical (Y-axis) and quantity demanded on the horizontal (X-axis). The curve typically slopes downwards from left to right, illustrating the law of demand: as the price of a good decreases, the quantity demanded increases, and vice versa.
2. What is the difference between an individual demand curve and a market demand curve?
The primary difference lies in the scope of demand they represent.
- An individual demand curve illustrates the quantity of a good that a single consumer is willing and able to purchase at different prices.
- A market demand curve represents the total quantity of a good that all consumers in a market are willing and able to purchase at different prices. It is derived by horizontally summing the individual demand curves of all consumers in the market.
3. What are the main factors that determine the demand for a commodity?
The demand for a commodity is influenced by several factors, often called the determinants of demand. The key factors are:
- Price of the commodity: The most direct factor; a change in price causes movement along the demand curve.
- Income of the consumer: Higher income generally leads to higher demand for normal goods.
- Prices of related goods: This includes substitutes (e.g., tea and coffee) and complements (e.g., cars and petrol).
- Tastes and preferences: Consumer preferences, influenced by trends, advertising, and habits, can shift demand.
- Expectations of future price changes: If consumers expect prices to rise in the future, current demand may increase.
4. Why is the demand curve generally downward-sloping, and are there any exceptions?
The demand curve is generally downward-sloping due to the inverse relationship between price and quantity demanded. This is explained by two main effects: the income effect (a lower price increases the consumer's real income, allowing them to buy more) and the substitution effect (a lower price makes the good relatively cheaper than its substitutes, encouraging consumers to switch to it). However, there are rare exceptions where the demand curve can be upward-sloping. This occurs for Giffen goods, which are highly inferior goods that people consume more of as the price rises because they can no longer afford superior substitutes.
5. What is the difference between a 'movement along' the demand curve and a 'shift' in the demand curve?
This distinction is crucial in understanding demand.
- A movement along the demand curve is caused exclusively by a change in the price of the commodity itself. An increase in price causes an upward movement (contraction of demand), while a decrease in price causes a downward movement (extension of demand).
- A shift in the demand curve (either to the right or left) is caused by a change in any factor other than the price of the commodity. These factors include changes in consumer income, tastes, or the price of related goods. A rightward shift signifies an increase in demand, while a leftward shift signifies a decrease in demand.
6. How does the concept of a demand curve apply to a real-world product, like smartphones?
The demand curve for smartphones clearly illustrates economic principles. When a new high-end model is launched at a high price, a certain quantity is demanded. As the price drops over time, or during sales events, the quantity demanded increases, showing a movement along the demand curve. Furthermore, the entire curve can shift. For example, the introduction of 5G technology (a change in preference/technology) or an increase in average consumer income would shift the entire demand curve for 5G-enabled smartphones to the right, meaning more phones would be sold at every price point.
7. Is there a universal formula for a demand curve?
There is no single universal formula, but economists use a concept called the demand function to express the relationship mathematically. A simple linear demand function is often represented as Qd = a - bP, where:
- Qd is the quantity demanded.
- a is the quantity demanded when the price is zero (it represents the combined effect of all non-price factors).
- b is the slope of the demand curve, showing how much the quantity demanded changes for each one-unit change in price.
- P is the price of the good.
