Demand Curve

Understanding the demand curve

Demand can be defined as the desire to buy goods and services with the ability to pay. The demand curve is a graphical representation between the price of a good and the quantity demanded for a given period of time.

Based on the ‘Law of Demand’ which states that “holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good”. Hence, at higher prices, consumer would be less wiling to buy, while at lower prices, consumers will increase the quantity purchased. Inherently, this gives us a downward sloping demand curve.

demand curve - demand schedule - downward sloping demand curve - law of demand

The foundation for the law of demand

There are 2 main effects that take place behind the scene that lays the foundation for the law of demand:

  • The income effect:  When the price of a good falls, people will be able to buy more even if their income has not changed. 
  • The substitution effect:  The good will now be cheaper compared to other goods.  People will switch to consuming the cheaper good.

Taken together, these two effects can explain why the demand curve is downward sloping.

Distinguishing between 'change in quantity demanded' vs 'change in demand'

change in quantity demanded - movement along the demand curve
shifts of demand curve - demand curve shifts left - demand curve shifts right

What can shift the demand curve?

1. Consumer income

An increase in consumer income, the consumption of a particular good will generally increase, hence the curve shifts right. This is true for most goods (i.e. “normal goods”). For “inferior goods” however, higher level of income may result in a decrease of the demand curve.

2. Changes in prices of related goods

a) Complementary goods – these are goods which are used together (e.g. cars and petrol) — when price of one good falls, the demand for the other good increases.

b) Substitute goods – these are goods may be used in place of one another (e.g. coffee and tea) — when the price of one good falls, the demand for the other good decreases.

3. Consumer tastes and preferences

Taste refers to the general preference of a population. Consumer taste and preferences may change based on climatic/seasonal conditions, amount of advertising, and fashion trends.

4. Future expectations

Future expectation of a price change or income change can cause demand to shift today.

5. Number of buyers

An increase in the number of buyers can increase the demand for a good. For instance, this can be due to an increase in immigrants, or increased availability of more markets.

Next, let’s look at the supply curve. After that, we can see how the demand curve and supply curve can help us understand how prices and quantity of goods in the market are determined.