The Demand Curve: A Visual Guide to Price and Quantity
The Law of Demand: The Foundation
Before we draw the curve, we must understand the rule it illustrates: the Law of Demand. This is one of the most reliable rules in all of economics. It states:
Think about it with a simple example: ice cream on a hot day. If the price of an ice cream cone is $5, you might buy one. If the price drops to $2, you might buy two, or a friend might decide to buy one too. If the price skyrockets to $10, you might skip it altogether. Your behavior follows the law of demand. The demand curve is simply a picture of this predictable behavior.
Drawing and Reading the Graph
Every graph needs axes. For the demand curve:
- Vertical Axis (Y-axis): Represents the Price (P) of the good, measured in dollars, euros, etc.
- Horizontal Axis (X-axis): Represents the Quantity Demanded (Qd), measured in units (like cones, kilograms, or bottles).
Now, imagine we survey people about how many movie tickets they would buy per month at different prices. We get this data:
| Price per Ticket (P) | Quantity Demanded (Qd) per month |
|---|---|
| $20 | 0 tickets |
| $15 | 100 tickets |
| $10 | 200 tickets |
| $5 | 400 tickets |
| $0 (Free) | 800 tickets |
This table is called a demand schedule. When we plot these points on our graph and connect them, we get the demand curve. It will always slope downwards from left to right. This downward slope is the visual signature of the Law of Demand.
Movement Along vs. Shift of the Curve
This is a critical distinction. The demand curve can show two different types of changes:
1. Movement Along the Curve (Change in Quantity Demanded): This happens only when the price of the good itself changes. It is a visual movement from one point to another on the same, fixed demand curve. For example, if the price of movie tickets falls from $15 to $10, we move down along the curve, and the quantity demanded increases from 100 to 200 tickets. This is not a "change in demand"—it is a change in the quantity demanded caused by the price change.
2. Shift of the Entire Curve (Change in Demand): This happens when an external factor changes, other than the price of the good itself. When this occurs, the entire demand curve moves leftward (decrease in demand) or rightward (increase in demand). At every single price point, people now want to buy a different quantity than before.
The "Shifters" of Demand: What Moves the Curve?
What are these external factors that can shift the entire demand curve? Economists call them the determinants of demand. Remember the "ceteris paribus" condition? When these change, "all else" is no longer "equal."
| Determinant (Shifter) | Example (Rightward Shift / Increase in Demand) | Example (Leftward Shift / Decrease in Demand) |
|---|---|---|
| 1. Consumer Income | People get a raise, demand more restaurant meals (a normal good2). | A recession causes job losses, demand for new cars falls. |
| 2. Prices of Related Goods - Substitutes3 - Complements4 | Substitute: Price of coffee rises, demand for tea increases. Complement: Price of smartphones drops, demand for phone cases increases. | Substitute: Price of streaming services falls, demand for cable TV decreases. Complement: Price of gasoline soars, demand for large SUVs decreases. |
| 3. Tastes and Preferences | A popular influencer wears a new brand of sneakers, demand for them spikes. | A news report links a food to health risks, demand for it plummets. |
| 4. Expectations | People expect the price of lumber to rise next month, so they buy more today. | Consumers expect a new, better game console to be released next year, so they delay buying the current model. |
| 5. Number of Buyers | A town's population grows, increasing demand for houses, groceries, and services. | A major employer leaves a city, people move away, demand for local services falls. |
A Real-World Case: Smartphones and App Stores
Let's apply these concepts to a modern example: smartphones and their app stores. This shows how demand curves interact in related markets.
Step 1: The Core Product. A company launches a new smartphone at a price of $800. They draw their expected demand curve for the phone. If they later have a sale at $600, they move down along that demand curve, and quantity demanded increases (a movement).
Step 2: A Positive Shift. A famous tech reviewer gives the phone a perfect score, boosting its popularity (a change in tastes and preferences). This shifts the entire demand curve for the phone to the right. Now, at the same $800 price, more people want to buy it than before the review.
Step 3: Complementary Goods. Smartphones and apps are perfect complements. If the price of popular apps in the app store decreases (or many high-quality free apps are released), this makes smartphone ownership more valuable. The lower app prices act as a demand shifter for the phone itself, shifting its demand curve rightward again.
Step 4: Substitutes. If a competing phone (a substitute) has a major battery problem, some of its potential buyers will switch. The demand for our original smartphone shifts rightward once more.
Through this chain of events, the smartphone's demand curve has shifted significantly to the right without the company changing the phone's price at all. This example shows how businesses must think beyond their own price and consider the entire ecosystem that affects their product's demand.
Important Questions
Q1: Why does the demand curve slope downward? What are the main reasons?
There are three key explanations, each building on common sense:
- The Substitution Effect: When the price of a good falls, it becomes cheaper relative to other goods. Consumers will naturally substitute away from the now relatively more expensive alternatives and buy more of the cheaper good. If the price of chicken falls while beef stays the same, people buy more chicken and less beef.
- The Income Effect: When a price falls, it's as if your real income (your purchasing power) increases. With the same amount of money, you can now afford to buy more of that good, and possibly more of other goods too. If bus fare is cut in half, you have money left over that could be used for more bus trips or for something else.
- The Law of Diminishing Marginal Utility5: Utility means satisfaction. The first unit of a good you consume (like the first slice of pizza) gives you high satisfaction. The second gives you a little less. By the fourth or fifth, you get much less additional satisfaction. Therefore, you will only be willing to pay a high price for the first unit. To convince you to buy more, the price must fall.
Q2: Can a demand curve ever slope upward? Is there an exception to the Law of Demand?
Yes, but it is very rare and theoretical. The famous exception involves Giffen goods6. A Giffen good is an extremely basic, inferior good that constitutes a large portion of a very poor consumer's budget (like staple food in a famine). If the price of this staple (e.g., rice) rises, the family is so poor that they can no longer afford any small amounts of meat or vegetables. They are forced to spend all their extra money on even more rice just to survive, even though its price went up. This leads to a higher quantity demanded at a higher price. In reality, true Giffen goods are hard to find, and for 99.9% of goods, the demand curve slopes downward.
Q3: How do businesses and governments use the concept of the demand curve?
They use it constantly for decision-making:
- Business Pricing: A company will estimate its demand curve to find the optimal price that maximizes revenue. They might test different prices to see how quantity demanded changes (mapping the curve).
- Sales and Discounts: A store plans a sale because it knows a lower price (movement down the demand curve) will significantly increase quantity sold, hopefully enough to increase total revenue.
- Government Policy (Taxes): If a government wants to tax cigarettes to reduce smoking, it is using the law of demand. It knows that increasing the price (via tax) will cause a movement along the demand curve, leading to a lower quantity demanded.
- Public Services: A city transit authority studies the demand curve for bus rides. It might learn that lowering fares doesn't increase ridership much (an inelastic demand curve), which informs its funding and pricing strategies.
Footnote
1 Ceteris Paribus: A Latin phrase meaning "all other things being equal" or "holding other factors constant." It is a crucial assumption used to isolate the effect of one variable (like price) on another (quantity demanded).
2 Normal Good: A good for which demand increases when consumer income rises, and decreases when income falls. Most goods are normal goods.
3 Substitutes: Goods that can be used in place of one another (e.g., butter and margarine, tea and coffee). An increase in the price of one leads to an increase in demand for the other.
4 Complements: Goods that are used together (e.g., smartphones and data plans, printers and ink). An increase in the price of one leads to a decrease in demand for the other.
5 Law of Diminishing Marginal Utility: The economic principle that as a person consumes more units of a good, the additional satisfaction (marginal utility) gained from each new unit eventually declines.
6 Giffen Good: A theoretical type of inferior good where demand increases as its price rises, violating the standard law of demand. This occurs due to a strong income effect overpowering the substitution effect for very poor consumers.