Demand curve

Definition

The demand curve for a good, service, or commodity, is defined with the following in the background:

• The specific good, service, or commodity.
• A unit for measuring the quantity of that commodity.
• A unit for measuring price.
• A certain set of economic actors who are the potential buyers of that commodity.
• An economic backdrop that includes all the determinants of demand other than the unit price of that commodity.

The demand curve is a curve drawn with:

• The vertical axis is the price axis, measuring the price per unit of the commodity.
• The horizontal axis is the quantity axis, measuring the quantity of the commodity demanded in total by all the economic actors chosen above.

Note that the demand curve makes sense only ceteris paribus -- all other determinants of demand being kept constant.

A demand schedule is a discrete version of the demand curve, specifying demand values for a number of different prices.

Curve characteristics

Slope or first derivative

The slope (or rate of change) of the demand curve is the reciprocal of what is termed the price-elasticity of demand. The price-elasticity measures the total change in quantity demanded per unit change in price. (The reciprocal needs to be taken because slope, as defined mathematically, measures the rate at which the vertical coordinate changes with respect to the horizontal coordinate, while price-elasticity measures the rate at which the horizontal coordinate changes with respect to the vertical coordinate).

Sign of slope

Further information: Law of demand

Typically, the price-elasticity of demand is negative, which is equivalent to saying that the slope of the demand curve is negative, or the demand curve is downward-sloping. In other words, ceteris paribus:

• A decrease in the price per unit leads to an increase in the total quantity demanded.
• An increase in the price per unit leads to a decrease in the total quantity demanded.

This is termed the law of demand. There are two broad explanations for the law of demand:

• Concavity of the utility functions of individuals and households: the marginal utility of an individual or household per unit of a good decreases with the amount already purchased.
• Heterogeneity in demand, i.e., differences in the reservation prices across households.

An exception to the law of demand is Veblen goods, whose demand is related to conspicuous consumption. Other goods that appear to violate the law of demand (though they do not directly violate it) are Giffen goods and certain kinds of goods where there is inadequate information about quality and a higher price may be taken as a signal of higher quality.

Sign of second derivative

There is no general principle that uniformly predicts the sign of the second derivative; in other words, there is no overarching rule about whether the price-elasticity of demand rises or falls with price.

Movement along the curve

Any particular price corresponds to a point on the demand curve: the price coordinate of the point is that price, while the quantity coordinate is the quantity demanded at the price. Changes in price, while keeping other factors constant, is termed movement along the demand curve. Decreasing price with time is termed riding down the demand curve (also called price skimming) while increasing price with time is termed riding up the demand curve.

In a free market, suppliers are expected to vary their price until demand equals supply. In other words, demand moves along the demand curve until the price reaches the market price.

Movement of the curve

The demand curve changes when one (or more) of the determinants of demand other than price changes.

Outward shift of the demand curve

An outward shift of the demand curve indicates an increase in the demand at every price, or equivalently, an increase in the price needed to restrict demand to a particular level.

Inward shift of the demand curve

An inward shift of the demand curve indicates a decrease in the demand at every price, or equivalently, a decrease in the price needed to restrict demand to a particular level.

Other shape changes of the demand curve

The demand curve may change in shape in a way that moves it inward for some price levels and outward for other price levels. This may happen, for instance, with changes in the income distribution.