Demand curve

Definition

A demand curve is a graphical representation that shows the relationship between the price of a good or service and the quantity demanded by consumers at those prices. Typically, it slopes downward from left to right, indicating that as prices decrease, the quantity demanded increases, reflecting the law of demand. This curve plays a crucial role in understanding how markets operate and helps to determine equilibrium prices.

5 Must Know Facts For Your Next Test

1. The demand curve is typically downward sloping due to the law of demand, showing an inverse relationship between price and quantity demanded.
2. Factors such as consumer income, tastes, and prices of substitutes can cause shifts in the demand curve to either the left or right.
3. The demand curve can be represented in both linear and non-linear forms, depending on how consumers respond to price changes.
4. Understanding the demand curve helps businesses set prices and forecast sales based on consumer behavior.
5. When plotting a demand curve, each point represents a specific price and the corresponding quantity demanded at that price.

Review Questions

• How does the law of demand relate to the shape of the demand curve?
  • The law of demand states that there is an inverse relationship between price and quantity demanded. This relationship is visually represented by the downward-sloping shape of the demand curve. As prices decrease, consumers are more willing to buy more of a good or service, which is why the curve slopes downward from left to right.
• Discuss how factors such as income and consumer preferences can shift the demand curve.
  • Factors like changes in consumer income or preferences can shift the entire demand curve either to the left or right. For example, if consumer incomes rise, they may buy more goods even at higher prices, causing a rightward shift in the demand curve. Similarly, if a new trend makes a product more desirable, this can increase demand at all price levels, also shifting the curve right.
• Evaluate the impact of a leftward shift in the demand curve on market equilibrium.
  • A leftward shift in the demand curve indicates a decrease in quantity demanded at every price level. This change leads to a new market equilibrium where the supply exceeds demand at previous prices, resulting in surplus. To restore equilibrium, suppliers may need to lower prices, which adjusts market conditions until quantity supplied equals quantity demanded again.

Related terms

law of demand: The principle that states that, all else being equal, as the price of a good or service decreases, the quantity demanded by consumers increases.

market equilibrium: The point at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers, leading to stable prices.

shifts in demand: Changes in consumer preferences, incomes, or prices of related goods that cause the entire demand curve to move to the left or right, indicating an increase or decrease in demand.