Demand Curve

Key takeaways

• A demand curve shows how the quantity demanded of a good varies with its price.
• Price is typically on the vertical (y) axis and quantity on the horizontal (x) axis; the curve usually slopes downward from left to right (law of demand).
• Price elasticity measures how responsive quantity demanded is to price changes.
• Non-price factors (income, preferences, prices of related goods, expectations, population) shift the entire demand curve.
• Exceptions include Giffen goods and Veblen goods, where higher prices can increase demand.

What the demand curve is

A demand curve is a graphical representation of the relationship between the price of a good and the quantity consumers are willing and able to buy over a given period. It depicts the quantities demanded at different prices and is a basic tool for analyzing consumer behavior and market outcomes.

How it works

• Axes: price on the vertical axis, quantity demanded on the horizontal axis.
• Law of demand: all else equal, as price rises, quantity demanded falls; as price falls, quantity demanded rises. This typically produces a downward-sloping curve.
• In economic graphs price is treated as the independent variable (on the y-axis) and quantity as the dependent variable (on the x-axis), a convention unique to many economic models.

Types of demand curves

• Individual demand curve — shows how much a single consumer will buy at each price.
• Example: If Joel buys 4 slices of pizza at $1.50 each but increases consumption as the price falls, those price-quantity pairs form his individual demand curve.
• Market demand curve — the horizontal sum of all individual demand curves in a market; it shows total quantity demanded by all consumers at each price. Market curves tend to be flatter than individual curves because aggregated demand responds more smoothly to price changes.

Price elasticity of demand

Price elasticity of demand (PED) quantifies the responsiveness of quantity demanded to a percentage change in price:
PED = (% change in quantity demanded) / (% change in price)

Examples:
* If a 50% price increase causes a 50% drop in quantity demanded, PED = 1 (unit elastic).
* If a 50% price increase causes only a 10% drop in quantity demanded, PED = 0.2 (inelastic).

Interpretation:
* Elastic demand (PED > 1): quantity demanded changes proportionally more than price — the curve is relatively flat.
* Inelastic demand (PED < 1): quantity demanded changes proportionally less than price — the curve is relatively steep.
* Perfectly inelastic or elastic are extreme cases (vertical or horizontal curves).

Commonly elastic goods: luxury and highly substitutable items (certain branded consumer goods).
Commonly inelastic goods: necessities with few substitutes (basic utilities, some prescription drugs).

Factors that shift the demand curve

A change in any non-price determinant of demand shifts the entire curve:
* Income: higher income typically shifts demand right for normal goods; lower income shifts it left.
* Preferences/tastes: changes in consumer tastes can increase or decrease demand.
* Prices of related goods:
* Substitutes: if the substitute’s price rises, demand for the good increases (shift right).
* Complements: if the price of a complement rises, demand for the good decreases (shift left).
* Population and demographics: more consumers increase market demand (shift right).
* Expectations about future prices or income: expected higher future prices can increase current demand (shift right).
* Advertising, regulations, and seasonal effects also alter demand.

Exceptions to the downward slope

While most demand curves slope downward, two notable exceptions exist:

Giffen goods
Low-income staple goods for which no close substitutes exist can display rising demand when price rises. Higher prices reduce real income so much that consumers cut back on superior goods and consume more of the staple, producing an upward-sloping demand curve.

Veblen goods
Luxury or status goods whose desirability increases with price. Higher prices can make such goods more desirable as signals of prestige (conspicuous consumption), leading to upward-sloping demand in some ranges.

Demand curve vs. supply curve

• Demand curve: relationship between price and quantity demanded; usually downward-sloping.
• Supply curve: relationship between price and quantity supplied; usually upward-sloping (higher prices incentivize greater production).

Together, demand and supply determine market equilibrium price and quantity.

Conclusion

The demand curve is a foundational concept in microeconomics that links price to consumer purchasing behavior. Understanding its shape, elasticity, and the factors that shift it helps explain market responses to price changes, policy actions, and external shocks. Exceptions such as Giffen and Veblen goods illustrate situations where typical price–quantity relationships break down.