In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity 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. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together, assuming independent decision-making.
Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price (the price at which sellers together are willing to sell the same amount as buyers together are willing to buy, also known as market clearing price) and the equilibrium quantity (the amount of that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand) of that market. In a monopolistic market, the demand curve facing the monopolist is simply the market demand curve.
Demand curves are usually considered as theoretical structures that are expected to exist in the real world, but real world measurements of actual demand curves are difficult and rare.
Origins of Demand CurveEdit
The demand for intermediate goods comes from the demand for the final goods they help produce is obvious and appealing. This idea was introduced by Cournot (1838) and explicitly stated by Gossen (1854) and Menger (1871). Then Alfred Marshall in his Principles of Economics (1890) was first to come up with the term ‘derived demand’ and developed the concepts of the derived demand curve for an input and the elasticity of derived demand. Following Marshall, Hicks found that the assumption of fixed production coefficients was not necessary (1932) and stated that 'it is "Important to be unimportant"' to get a low elasticity of derived demand (1932). Some other more recent come from Joan Robinson (1933) and Wisecarver (1974).
Linear demand curveEdit
The demand curve is often graphed as a straight line where a and b are parameters:
The constant "a" embodies the effects of all factors other than price that affect demand. If income were to change, for example, the effect of the change would be represented by a change in the value of "a" and be reflected graphically as a shift of the demand curve. The constant "b" is the slope of the demand curve and shows how the price of the good affects the quantity demanded.
The graph of the demand curve uses the inverse demand function in which price is expressed as a function of quantity. The standard form of the demand equation can be converted to the inverse equation by solving for P:
There is movement along a demand curve when a change in price causes the quantity demanded to change. It is important to distinguish between movement along a demand curve, and a shift in a demand curve. Movements along a demand curve happen only when the price of the good changes. When a non-price determinant of demand changes the curve shifts. These "other variables" are part of the demand function.
The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the same—in other words, the things whose changes might cause a consumer to buy more or less of a good even if the good's own price remained u.
Some of the more important factors are the prices of related goods (both substitutes and complements), income, population, and expectations. However, demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances; so, any circumstance that affects the consumer's willingness or ability to buy the good or service in question can be a non-price determinant of demand. As an example, weather could be a factor in the demand for beer at a baseball game.
When income increases, the demand curve for normal goods shifts outward as more will be demanded at all prices, while the demand curve for inferior goods shifts inward due to the increased attainability of superior substitutes. With respect to related goods, when the price of a good (e.g. a hamburger) rises, the demand curve for substitute goods (e.g. chicken) shifts out, while the demand curve for complementary goods (e.g. tomato sauce) shifts in (i.e. there is more demand for substitute goods as they become more attractive in terms of value for money, while demand for complementary goods contracts in response to the contraction of quantity demanded of the underlying good).
- Changes in disposable income, the magnitude of the shift also being related to the income elasticity of demand.
- Changes in tastes and preferences—tastes and preferences are assumed to be fixed in the short-run. This assumption of fixed preferences is a necessary condition for aggregation of individual demand curves to derive market demand.
- Changes in expectations.
- Changes in the prices of related goods (substitutes and complements)
Changes that decrease or increase demandEdit
Factors affecting market demandEdit
Market demand is the summation of individual demand curves. In addition to the factors which can affect individual demand there are three factors that can affect market demand (cause the market demand curve to shift):
- a change in the number of consumers,
- a change in the distribution of tastes among consumers,
- a change in the distribution of income among consumers with different tastes.
Some circumstances which can cause the demand curve to shift in include:
- Decrease in price of a substitute
- Increase in price of a complement
- Decrease in income if good is normal good
- Increase in income if good is inferior good
Movement along a demand curveEdit
There is movement along a demand curve when a change in price causes the quantity demanded to change. It is important to distinguish between movement along a demand curve, and a shift in a demand curve. Movements along a demand curve happen only when the price of the good changes. When a non-price determinant of demand changes the curve shifts. These "other variables" are part of the demand function. They are "merely lumped into intercept term of a simple linear demand function."  Thus a change in a non-price determinant of demand is reflected in a change in the x-intercept causing the curve to shift along the x axis.
Discreteness of amountsEdit
If a commodity is sold in whole units, and these are valuable for a consumer, then the individual demand curve can hardly be approximated by a continuous curve. It is a set function of the price, defined by a price above which no unit is bought, a price range for which one is bought, etc.
Units of measuresEdit
If the local currency is dollars, for example, then the units of measurement of the variable "price" are "dollars per unit of the good" and the units of measurement of "quantity" are "units of the good per time (e.g., per week or per year). Thus quantity demanded is a flow variable.
Price elasticity of demand (PED)Edit
PED is a measure of the sensitivity of the quantity variable, Q, to changes in the price variable, P. Elasticity answers the question of how much the quantity will change in percentage terms for a 1% change in the price, and is thus important in determining how revenue will change. PED is negative because of the inverse relationship between the price of a good and the quantity of the good demanded, a consequence of the law of demand.
The elasticity of demand indicates how sensitive the demand for a good is to a price change. If the absolute value of PED is between zero and 1, demand is said to be inelastic; if the absolute value of PED equals 1, the demand is unitary elastic; and if the absolute value of Price elasticity of demand is greater than 1, demand is elastic. A low coefficient implies that changes in price have little influence on demand. A high elasticity indicates that consumers will respond to a price rise by buying a lot less of the good and that consumers will respond to a price cut by buying a lot more...
Taxes and subsidiesEdit
A sales tax on the commodity does not directly change the demand curve, if the price axis in the graph represents the price including tax. Similarly, a subsidy on the commodity does not directly change the demand curve, 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 addition of tax and/or subtraction of subsidy then the demand curve moves inward when a tax is introduced, and outward when a subsidy is introduced.
|Wikimedia Commons has media related to Supply and demand curves.|
- O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 81–82. ISBN 0-13-063085-3.
- Krugman, Paul, and Wells, Robin. Microeconomics. Worth Publishers, New York. 2005.
- "Why Uber Is an Economist's Dream - Freakonomics".
- John, Whitaker (2008). "Derived Demand". The New Palgrave Dictionary of Economics.
- Besanko and Braeutigam (2005) p/ 91.
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- Underwood, Instructor's Manual, Microeconomics 5th ed. (Prentice-Hall 2001) at 5.
- "Demand and Supply". www.harpercollege.edu.
- Kittaneh, Firas (January 24, 2014). "5 Strategies for Generating Consumer Demand". Entrepreneur. Retrieved August 30, 2017.
- Patel, Sujan (October 22, 2016). "7 Marketing Tips To Create A Demand For Your New Product". Forbes. Retrieved August 30, 2017.
- Ylywotzky, Adrian (September 6, 2011). "The Six Secrets Of Demand Creation". Fast Company. Retrieved August 30, 2017.
- Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd ed. Addison-Wesley 1998. A change in relative price changes the distribution of income which in turn changes the demand curve.
- The x intercept is affected because the standard diagram uses the inverse demand function