Economics

demand curve

What is a demand curve?

A demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded over a given time period. In a typical representation, price will appear on the left vertical axis and quantity demanded on the horizontal axis.

Understanding the Demand Curve

The demand curve will move down from left to right, which expresses the law of demand – when the price of a given good increases, the quantity demanded decreases, other things being equal.

Note that this formula means that price is the independent variable and quantity is the dependent variable.In most disciplines, independent variables appear at the level or Xaxis, but economics is an exception to this rule.

For example, if the price of corn rises, consumers will have an incentive to buy less corn and use it to replace other foods, so the total consumer demand for corn will fall.

elasticity of demand

The degree to which an increase in price translates into a decrease in demand is called the elasticity of demand or the price elasticity of demand. If the price of corn rises by 50% and the demand for corn falls by 50%, the elasticity of demand for corn is 1. If the price of corn increases by 50% and the quantity demanded decreases by only 10%, the elasticity of demand is 0.2. A product with a more elastic demand has a shallower (closer to horizontal) demand curve, and a product with a less elastic demand has a steeper (closer to vertical) demand curve ).

If factors other than price or quantity change, a new demand curve needs to be drawn. For example, suppose an area’s population explodes, increasing the number of mouths to be fed. In this case, even if the price remains the same, more corn will be needed, which means that the curve itself shifts to the right (D2) in the image below. In other words, demand will increase.

Other factors can also alter the demand curve, such as changes in consumer preferences. If a cultural shift causes the market to shun corn in favor of quinoa, the demand curve will shift to the left (D3). If consumers’ incomes drop, their ability to buy corn decreases, and demand will shift to the left (D3). If the price of substitutes – from the consumer’s perspective – rises, consumers will switch to buying corn and demand will shift to the right (D2). If the price of supplements (such as charcoal for grilling corn) increases, demand will shift to the left (D3). If the future price of corn is higher than the current price, demand will temporarily shift to the right (D2) because consumers are motivated to buy immediately before prices increase.

The terminology surrounding requirements can be confusing. “Quantity” or “quantity demanded” refers to the quantity of a good or service, such as ears of corn, bushels of tomatoes, available hotel rooms, or labor hours. In everyday use, this might be called “demand”, but in economic theory, “demand” refers to the curve shown in the figure above, which represents the relationship between the quantity demanded and the price per unit.

exception to the demand curve

There are some exceptions to the rules that apply to the relationship between commodity prices and demand. One of these exceptions is Giffen merchandise. It’s a food that’s considered a staple, like bread or rice, for which there are no viable substitutes. Simply put, when prices rise, demand for Giffen goods increases, and when prices fall, demand falls. Demand for these commodities is on the rise, violating the law of demand. Therefore, there is no typical response for Giffen goods (increasing prices trigger substitution effects), and rising prices will continue to drive demand.

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