Demand Curve

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price appears on the left vertical axis while the quantity demanded is on the horizontal axis.

A demand curve doesn't look the same for every product or service. When the price rises, demand generally falls for almost any good, but the drop is much greater for some goods than for others. This is a reflection of the price elasticity of demand, a measurement of the change in consumption of a product in relation to a change in its price. The elasticity of demand for products varies between and within product categories, depending on the product’s substitutability.

How it works

As noted above, the demand curve is a commonly used graph that represents the relationship between prices and the total quantity of goods and services demanded over a certain period of time.
Prices normally appear on the y-axis while demand is depicted on the x-axis.
This curve generally moves downward from the left to the right. This movement expresses the law of demand, which states that as the price of a given commodity increases, the quantity demanded decreases as long as all else is equal.
Note that this formulation implies that price is the independent variable, and quantity is the dependent variable.
In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.

Types of Demand Curves

Individual Demand Curve

An individual demand curve is one that examines the price-quantity relationship for an individual consumer, or how much of a product an individual will buy given a particular price.
Let's say the price of a slice of pizza is $1.50 and Joel is accustomed to buying four slices for lunch every workday (4 x $1.50 x 5 = $30). If the price drops to $1 a slice, four slices will cost Joel $20 (4 x $1 x 5), and Joel might demand six slices instead of four.
But if the price drops to 75 cents a slice, he might demand eight slices a day. With the price information and the number of slices Joel will demand at that price, it would be possible to plot an individual demand curve.

Market Demand Curve

The demand curve plots out the demand for an individual consumer, hence the name individual demand curve. But they don't take entire markets into account. That's where the market demand curve comes in.
A market demand curve is the summation of the individual demand curves in a given market. It shows the quantity of a good demanded by all individuals at varying price points. Keep in mind that this graph doesn't outline what consumers want. Rather, it depicts the goods and services they'll buy if they have the purchasing power to do so.
Determining the market demand curve is as easy as adding up all of the individual demand curves. This is then plotted along the horizontal or x-axis of the graph. Unlike individual demand curves, which are generally steeper, market demand curves tend to be flatter. That's because demand in the market is more proportionate as prices change compared to changes in individual demand.

Demand Elasticity

The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand. If a 50% rise in corn prices causes the quantity of corn demanded to fall by 50%, the demand elasticity of corn is 1.
If a 50% rise in corn prices only decreases the quantity demanded by 10%, the demand elasticity is 0.2. Elasticity measures how demand shifts when economic factors change. When demand remains constant regardless of price changes, it is called inelasticity.

Elastic Demand Curve

The demand curve is shallower (closer to the horizontal axis) for products with more elastic demand. Goods with more elastic demand are those for which a change in price leads to a significant shift in demand.
Elastic goods include luxury products and consumer discretionary items, such as a brand of candy bar or cereal. Food items are easily substituted, and brand-name products are easily replaced by items that are lower in price.

Inelastic Demand Curve

The demand curve for items that are less elastic or inelastic is steeper (closer to the vertical axis). Inelastic goods are generally necessities, for which there are few, if any, substitutes.
Common examples are utilities, prescription drugs, and tobacco products. Demand often remains constant for these items despite price changes.

Exceptions to the Demand Curve

There are some exceptions to the rules that apply to the relationship that exists between prices of goods and demand.

1. Giffen Goods: these are inferior goods for which demand increases when the price rises. This happens because poor consumers cannot afford better substitutes and continue buying more of the cheaper staple food.

2. Veblen Goods (Prestige Goods):These are luxury goods whose demand increases with an increase in price because they provide status and prestige. Consumers buy them to show wealth and social position.

3. Speculative Demand: When people expect the price of a commodity to rise further in the future, they buy more of it even if its current price increases. This type of demand is common in markets like gold, shares, and property.

4. Ignorance of Consumers: Sometimes consumers believe that higher price means better quality. Because of this misunderstanding, they may buy more of a product even when its price increases.

5. Necessaries of Life: For essential goods like basic food items or medicines, demand does not fall much even if the price rises. People must buy these goods to meet their basic needs

What Is the Law of Demand?

This is a fundamental economic principle that holds that the quantity of a product purchased varies inversely with its price. In other words, the higher the price, the lower the quantity demanded. And at lower prices, consumer demand increases. The law of demand works with the law of supply to explain how market economies allocate resources and determine the price of goods and services in everyday transactions.

What Is the Difference Between a Demand Curve and a Supply Curve?

A demand curve represents the relationship between the price of a good or service and the quantity demanded for a given period of time. Typically, as the price rises, the demand falls; as a result, the curve slopes down from left to right.
A supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given time period. Typically, as the price of a product increases, the quantity supplied also increases. The resultant curve slopes upward from left to right.

Does the Demand Curve Slope Downward or Upward?

The demand curve generally slopes downward from left to right, illustrating that as the price of a good rises, the demand for it falls. However, there are exceptions to the rule—for Giffen goods and Veblen goods, for example. In both cases, rising prices tend to accompany a rise in demand, leading to a demand curve that rises from left to right.

What is the difference between individual and market demand curves?

An individual demand curve shows the relationship between price and quantity demanded for a single consumer, while a market demand curve represents the combined demand of all consumers in the market for a particular good or service.

What is the relationship between demand and elasticity?

Elasticity of demand measures the responsiveness of quantity demanded to changes in price. A demand curve can be elastic, inelastic, or unit elastic depending on the sensitivity of consumers to price changes.