The demand curve is a graphical representation of the demand for a specific good. The course of this curve depends on two variables: the price of the goods (y-axis) and the quantity demanded (x-axis). The lower the price, the higher the amount demanded.
In this lesson we will explain the meaning of the demand curve, its significance and the regularities to which it is subject. Then we go into the factors that influence the shape of the curve. After this lesson you will have the opportunity to test your knowledge with a few practice questions.
English: Demand curve
Why should you know the demand curve?
According to wholevehicles.com, the demand curve represents one of the elementary functions from economics. Together with the supply function, it forms the price-sales function, which indicates the functional relationship between the price of a supplier and the amount that can be sold within a period. The demand function thus also forms an essential basis for the theory of price formation.
The demand function
The demand curve is created using the demand function. This is a mathematical function that determines a certain amount of goods in demand for a given price. The price is usually shown on the vertical axis (y-axis) and the quantity on the horizontal axis (x-axis).
Basically, individual and aggregated demand functions can be distinguished from one another: The individual function represents the demand behavior of a single person, while the aggregated function represents the demand of all market participants.
Demand curve: graphical representation
The demand curve is usually represented as a linear function, in which all other factors that could influence demand (e.g. income) are hidden. The function is strictly monotonically decreasing, which means that the demanded quantity increases the further the price decreases. It is assumed that consumers want to purchase a certain good at the lowest possible price.
The price at which demand is exactly zero is known as the prohibitive price: no consumer is willing to purchase the product at this price any more.
On the other hand, there is the amount of saturation: In this case the price is exactly zero and the demand has reached its maximum. The consumers here are no longer interested in purchasing more units of this product, even if it does not cost them anything.
The so-called Giffen goods are an exception to this rule (law of demand). These are products whose demand increases when the price increases. The Giffen paradox is also used here. This effect can be observed, for example, with luxury goods that act as a kind of status symbol.
Example: prohibitive price & saturation amount
Lunch is offered in a cafeteria for € 3. A student who visits the cafeteria four times a week chooses this dish three times a week.
If the price went up to € 8, he would only choose it twice a week and choose something different for the remaining days. If the price even rose to € 16, the prohibitive price would be reached and he would no longer choose the dish.
Conversely, if lunch were free, he would choose it four times a week. The saturation level would then be reached, since he is only at the university on four days.
Shift in the demand curve
If other influencing factors are included, the demand curve shifts accordingly. Income is an important factor. The more money market participants have, the more they can afford. However, the reverse is also true.
In addition, future expectations can lead to a shift in the demand curve. If, for example, expectations are positive in the context of an upswing (expansion), the willingness to spend more money on goods also increases. During a downturn ( recession ) it is exactly the opposite.
In addition, the considered good itself can lead to a shift. If a completely new benefit can be recognized from this, or if a product does not meet the expectations of the potential buyers, there will be corresponding shifts in the demand curve.