Demand Curve and Nature of Curves

Demand Curve

Definition: The demand curve is a graphical representation that shows the relationship between the price of a good or service and the quantity demanded over a given period. Price is plotted on the vertical (Y) axis, while quantity is plotted on the horizontal (X) axis. The curve illustrates the law of demand, which states that the quantity demanded decreases as the price increases and vice versa.

Purpose:

• To visualize the relationship between price and quantity demanded.
• To help determine the equilibrium price and quantity when combined with the supply curve.

Drawing a Demand Curve

Demand Schedule: A demand schedule is a table that lists the quantity of a good or service that consumers are willing to purchase at various prices.

Example of a Demand Schedule for Premium Organic Coffee:

Demand Curve: Based on the demand schedule, a graph can be created where the price is on the Y-axis and quantity demanded on the X-axis. The curve typically slopes downward from left to right, indicating that as price decreases, quantity demanded increases.

Shifts in Demand Curve A shift in the demand curve means the entire curve moves to the right (increase in demand) or to the left (decrease in demand). Several factors can cause this shift:

• Changes in Income Levels:
  • If the good is a normal good, higher income levels will shift the demand curve outward (right), while lower income levels will shift it inward (left).
• Changes in Market Size:
  • An increase in the number of consumers (growing market) shifts the demand curve outward, while a decrease in the number of consumers (shrinking market) shifts it inward.
• Changes in the Price of Related Goods:
  • Complementary Goods: A decrease in the price of a complementary good shifts the demand curve outward, while an increase shifts it inward.
  • Substitute Goods: A decrease in the price of a substitute good shifts the demand curve inward, while an increase shifts it outward.

Example of a Shift in the Demand Curve: Assume the price of a complementary good, premium organic milk, decreases. This would increase the quantity demanded of premium organic coffee because more people buy milk, which is often consumed with coffee. Thus, the demand curve for premium organic coffee shifts outward.

Movements Along the Demand Curve Movements along the demand curve occur when there is a change in the price of the good itself. These movements do not shift the demand curve but indicate a change in the quantity demanded due to a price change.

Example: Using the original demand schedule for premium organic coffee:

• If the price is set at $6, the quantity demanded is 2,000.
• If the price decreases to $4, the quantity demanded increases to 3,000.

These changes are represented as movements along the same demand curve.

Summary

• Demand Curve: Graphical representation of the relationship between price and quantity demanded.
• Demand Schedule: Table showing quantities demanded at different prices.
• Shifts in Demand Curve: Caused by changes in income levels, market size, and prices of related goods.
• Movements Along the Curve: Changes in quantity demanded due to price changes of the good itself.

Example Tables and Demand Curve Representation

Individual Demand Schedule for Premium Organic Coffee:

Market Demand Schedule Example:

This table shows how the total market demand is derived from individual consumer demands at various prices.

Graphical Demand Curves

• Individual Demand Curve: A downward-sloping line showing the inverse relationship between price and quantity demanded.
• Market Demand Curve: Similar to the individual demand curve but represents the aggregate demand of all consumers in the market.

By understanding these concepts, businesses can make better decisions regarding pricing, production, and market strategies.