The demand curve is used to determine the relationship between the price of goods and services and the quantity demanded. When we try to go by the bookish language, it can be a little intimidating and hard to understand some of the basic concepts of Economics. So, here, let us try to simplify the explanation of the demand curve so that it can be a fun learning experience for you.
Meaning of Demand Curves in Economics
In Economics, the demand curve is represented with the help of line graphs. It is a way to show the relationship between the quantity of the purchased goods and services and their prices. While demonstrating this relationship with a line graph, you may mark the prices of goods and services on the vertical (Y) axis, and the quantity of the purchased goods should be marked horizontally on the (X) axis. The whole purpose of drawing and explaining a demand curve as a concept of Economics is to analyze the relationship between price and quantity to determine the Law of Demand. Before we dwell further into the details, let us tell you what is the meaning of the Law of Demand. This law states that the quantity demanded will have an inverse relationship with the price of the goods. This means, when the prices go high, the quantity demanded will decrease.
How To Draw A Demand Curve
Drawing a demand curve comes in certain steps. These steps are to be followed using the information provided to you in the form of a demand schedule. The demand schedule shows how many units of a commodity, good, or service will be purchased at various price points. Once you take cues from the demand schedule, you can be certain to know how the demand curve will be drawn. To explain this better, let us give you an example.
Below is the demand schedule for cotton:
As you can see here that every time the price is reduced, the quantity demanded is increased. This is the relationship that follows the Law of Demand. From this demand schedule, let us tell you how to plot a demand curve.
Factors Leading To Shift in the Demand Curve
The demand curve may not be static and can shift depending upon a few factors. Several factors can cause a shift in the demand curve, let us tell you more about them.
- Change in Income: With an increase in the income of the consumers, the demand curve may shift outwards, i.e., towards the right. A decrease in the income of the consumers may shift the demand curve inward, i.e., towards the left. Put simply, when consumers are earning more money, they can have the ability to spend more money and vice-versa.
- Change in Size of the Market: When we say that the size of the market is changing, it means that the presence of consumers is changing in the market, leading to a shift in the demand curve. A larger size of the market will shift the demand curve outwards, while a smaller size of the market will shift the demand curve inwards.
- Change in the Price of Related Goods and Services: Another factor that causes shifts in the demand curve is the impact of the change in the price of related goods and services. For example, if the price of Pepsi goes down significantly, the demand for its complementary good, Coca-Cola will increase or vice versa.
Movements Along the Demand Curve
Whenever there’s a price change, there will be a movement along the demand curve. Let us reflect on it with the help of the original demand schedule we discussed above. Fixate the price at P = $6. At this price, the quantity demanded would be 2000.
If the price were to change from P = $6 to P = $4, it would cause a movement along the demand curve, as the new quantity demanded would be 3000.
So, this was all about the demand curve and its corresponding concepts. Well, there are also some exceptions to the demand curve that you must know.
Exceptions to the Demand Curve
Just as every relationship in the world has certain exceptions to it, the demand curve too has its own set of exceptions.
- Giffen Goods: Giffen Goods are the staple food items like rice and bread which do not have any substitutes available, so the price of these goods does not affect the demand negatively. When the price goes up, their demand goes up, and when the price goes low, their demand goes low.
- Essential Goods: Certain goods and commodities that are essential will not have an impact from the increasing or decreasing prices. For example, medicines. No matter the pricing variations, if one needs to buy medicines they will do so irrespective of the price fluctuations. So, in this case, the essential goods become an exception to the demand curve.
- Luxury Goods: Goods and services that belong to the category of luxury items are another exception to the law of demand. These goods are mainly purchased by wealthy consumers who would buy such goods only if they have a high price. For a wealthy chunk of consumers, higher prices indicate higher prestige, social status, and value.