Demand curve

P 1 Characteristics
D1 D2 S
According to convention, the demand curve is drawn with
price on the vertical (y) axis and quantity on the horizon-
tal (x) axis. The function actually plotted is the inverse
demand function.
The demand curve usually slopes downwards from left to
right; that is, it has a negative association. The negative
slope is often referred to as the "law of demand", which
P2
means people will buy more of a service, product, or re-
P1 source as its price falls. The demand curve is related to
the marginal utility curve, since the price one is willing to
pay depends on the utility. However, the demand directly
depends on the income of an individual while the utility
does not. Thus it may change indirectly due to change in
Q1 Q2 demand for other commodities.
Q
However, with Veblen goods, such as status symbols, the
An example of a demand curve shifting. The shift from D1 To utility value of the good is largely the price and demand is
D2 means an increase in demand with consequences for the other higher at higher prices and the demand curve may curve
variables upwards. With a Gien good the price is taken by the
market as a signal of quality, irrespective of the true na-
ture of the product, and hence demand may be very low
when priced low and increase at higher price points.

In economics, the demand curve is the graph depicting

the relationship between the price of a certain commodity 2 Linear demand curve
and the amount of it that consumers are willing and able to
purchase at any given price. It is a graphic representation
of a market demand schedule.[1] The demand curve for all The demand curve is often graphed as a straight line of
consumers together follows from the demand curve of ev- the form Q = a bP where a and b are parameters. The
ery individual consumer: the individual demands at each constant a embodies the eects of all factors other than
price are added together, assuming independent decision- price that aect demand. If income were to change, for
making. example, the eect of the change would be represented by
a change in the value of a and be reected graphically
Demand curves are used to estimate behaviors in as a shift of the demand curve. The constant b is the
competitive markets, and are often combined with supply slope of the demand curve and shows how the price of
curves to estimate the equilibrium price (the price at the good aects the quantity demanded.[4]
which sellers together are willing to sell the same amount
as buyers together are willing to buy, also known as The graph of the demand curve uses the inverse demand
market clearing price) and the equilibrium quantity (the function in which price is expressed as a function of quan-
amount of that good or service that will be produced and tity. The standard form of the demand equation can be
bought without surplus/excess supply or shortage/excess converted [4] to the inverse equation by solving for P or P =
[2]
demand) of that market. In a monopolistic market, the a/b Q/b.
demand curve facing the monopolist is simply the market More plainly, in the equation P = a bQ, a is the inter-
demand curve. cept where price is zero (where the demand curve inter-
Demand curves are usually considered as theoretical cepts the X-axis), b is the slope of the demand curve,
structures that are expected to exist in the real world, but Q is quantity and P is price.
real world measurements of actual demand curves are dif- There is movement along a demand curve when a change
cult and rare.[3] in price causes the quantity demanded to change.[5] It

1
2 4 MOVEMENT ALONG A DEMAND CURVE

is important to distinguish between movement along a Changes in the prices of related goods (substitutes
demand curve, and a shift in a demand curve. Move- and complements)
ments along a demand curve happen only when the price
of the good changes.[6] When a non-price determinant Population size and composition
of demand changes the curve shifts. These other vari-
ables are part of the demand function. They are merely N.B. Whilst variations in the price of the ac-
lumped into intercept term of a simple linear demand tual product aects the overall quantity demanded,
function. [6] Thus a change in a non-price determinant of economists do not consider price to aect the de-
demand is reected in a change in the x-intercept causing mand curve.
the curve to shift along the x axis.[7]

3.2 Changes that decrease demand

3 Shift
3.3 Factors aecting market demand
The shift of a demand curve takes place when there is
a change in any non-price determinant of demand, re- Market or aggregate demand is the summation of individ-
sulting in a new demand curve.[5] Non-price determi- ual demand curves. In addition to the factors which can
nants of demand are those things that will cause de- aect individual demand there are three factors that can
mand to change even if prices remain the samein other aect market demand (cause the market demand curve
words, the things whose changes might cause a con- to shift):
sumer to buy more or less of a good even if the goods
own price remained unchanged.[8] Some of the more
important factors are the prices of related goods (both a change in the number of consumers,
substitutes and complements), income, population, and
expectations. However, demand is the willingness and a change in the distribution of tastes among con-
ability of a consumer to purchase a good under the pre- sumers,
vailing circumstances; so, any circumstance that aects
the consumers willingness or ability to buy the good or a change in the distribution of income among con-
service in question can be a non-price determinant of de- sumers with dierent tastes.[9]
mand. As an example, weather could be a factor in the
demand for beer at a baseball game. Some circumstances which can cause the demand curve
When income increases, the demand curve for normal to shift in include:
goods shifts outward as more will be demanded at all
prices, while the demand curve for inferior goods shifts
Decrease in price of a substitute
inward due to the increased attainability of superior sub-
stitutes. With respect to related goods, when the price of
Increase in price of a complement
a good (e.g. a hamburger) rises, the demand curve for
substitute goods (e.g. chicken) shifts out, while the de-
mand curve for complementary goods (e.g. tomato sauce) Decrease in income if good is normal good
shifts in (i.e. there is more demand for substitute goods as
they become more attractive in terms of value for money, Increase in income if good is inferior good
while demand for complementary goods contracts in re-
sponse to the contraction of quantity demanded of the
underlying good).[5] 4 Movement along a demand curve

3.1 Demand shifters There is movement along a demand curve when a change
in price causes the quantity demanded to change.[5] It
Changes in disposable income, the magnitude of the is important to distinguish between movement along a
shift also being related to the income elasticity of demand curve, and a shift in a demand curve. Move-
demand. ments along a demand curve happen only when the price
of the good changes.[6] When a non-price determinant
Changes in tastes and preferencestastes and pref-
of demand changes the curve shifts. These other vari-
erences are assumed to be xed in the short-run.
ables are part of the demand function. They are merely
This assumption of xed preferences is a neces-
lumped into intercept term of a simple linear demand
sary condition for aggregation of individual demand
function. [6] Thus a change in a non-price determinant of
curves to derive market demand.
demand is reected in a change in the x-intercept causing
Changes in expectations. the curve to shift along the x axis.[10]
 3

5 Discreteness of amounts 9 See also

If a commodity is sold in whole units, and these are valu- Demand (economics)
able for a consumer, then the individual demand curve Eect of taxes and subsidies on price
can hardly be approximated by a continuous curve. It is a
set function of the price, dened by a price above which Feasibility condition
no unit is bought, a price range for which one is bought,
Hicksian demand
etc.
Inverse demand function
Law of demand
6 Units of measurement Marshallian demand
Price point
If the local currency is dollars, for example, then the units
of measurement of the variable price are dollars per SonnenscheinMantelDebreu theorem
unit of the good and the units of measurement of quan-
tity are units of the good per time (e.g., per week or per Supply and demand
year). Thus quantity demanded is a ow variable. Wikiversity:Building the demand curve

10 References
7 Price elasticity of demand (PED)
[1] O'Sullivan, Arthur; Sherin, Steven M. (2003). Eco-
Main article: Price elasticity of demand nomics: Principles in Action. Upper Saddle River, New
Jersey 07458: Pearson Prentice Hall. pp. 8182. ISBN
0-13-063085-3.
PED is a measure of the sensitivity of the quantity vari-
able, Q, to changes in the price variable, P. Elasticity an- [2] Krugman, Paul, and Wells, Robin. Microeconomics.
swers the question of how much the quantity will change Worth Publishers, New York. 2005.
in percentage terms for a 1% change in the price, and is [3] http://freakonomics.com/podcast/
thus important in determining how revenue will change. uber-economists-dream/
The elasticity of demand indicates how sensitive the de- [4] Besanko and Braeutigam (2005) p/ 91.
mand for a good is to a price change. If the PED is be-
tween zero and 1, demand is said to be inelastic; if PED [5] Case, K.E., Fair, R.C. (1994). 'Demand, Supply, and
equals 1, the demand is unitary elastic; and if the Price Market Equilibrium', Chapter 4 in Principles of Eco-
elasticity of demand is greater than 1, demand is elastic. nomics, 3rd ed., Prentice Hall Englewood Clis, New Jer-
A low coecient implies that changes in price have little sey
inuence on demand. A high elasticity indicates that con- [6] Underwood, Instructors Manual, Microeconomics 5th ed.
sumers will respond to a price rise by buying a lot less of (Prentice-Hall 2001) at 5.
the good and that consumers will respond to a price cut
by buying a lot more... [7] The x intercept is aected because the standard diagram
uses the inverse demand function

[8] http://www.harpercollege.edu/mhealy/eco212i/lectures/
s&d/s&d.htm
8 Taxes and subsidies [9] Binger, B & Homan, E.: Microeconomics with Calculus,
2nd ed. Addison-Wesley 1998. A change in relative price
A sales tax on the commodity does not directly change changes the distribution of income which in turn changes
the demand curve, if the price axis in the graph repre- the demand curve.
sents the price including tax. Similarly, a subsidy on the [10] The x intercept is aected because the standard diagram
commodity does not directly change the demand curve, uses the inverse demand function
if the price axis in the graph represents the price after
deduction of the subsidy.
If the price axis in the graph represents the price before 11 External links
addition of tax and/or subtraction of subsidy then the de-
mand curve moves inward when a tax is introduced, and Pricing to the demand curve
outward when a subsidy is introduced.
4 12 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

12 Text and image sources, contributors, and licenses

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