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 demand curve?
Using the demand curve, you can identify how many units of a product or service will be bought at each possible price point. A demand schedule shows the relationship between quantity and price for a good or service, which is a table that shows the exact number of units of the good or service that will be purchased at different prices. The quantity of commodity demand in the market depends on the commodity's price and the price of other commodities, consumer income and preferences, and seasonal fluctuations.
Basic economic analysis typically holds all factors except the price of the commodity constant; the analysis is then conducted to examine the relationship between various price levels and the maximum quantity that consumers could purchase at each price. On a demand curve, price corresponds to the vertical axis while quantity corresponds to the horizontal axis, and the price and quantity combinations are plotted.
2. What is the aggregate of market demand curve?
When oil prices go up, all fuel stations must raise their prices to cover their costs. Consider fuel prices, which illustrate the market demand curve. Fuel prices are 70% influenced by oil prices; even if the price drops by 50%, drivers don't stockpile fuel. That's why people get upset when fuel prices increase by INR 1 - 1.2 per litre. Since they cannot reduce their driving to work, school, or the grocery store, they end up paying more for fuel. The aggregate demand curve is inelastic.
Fuel prices increase people's disposable income, which means they are less able to buy other goods. The lower-income of buyers means that despite the price not rising, they will purchase fewer product units. It is known as a demand shift, and in this case, both the demand curves for other goods shift to the left.
