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Economics

# Understanding the Demand Curve and How It Works

## Sarah Thomas

Subject Matter Expert

Learn what the demand curve is, how to calculate it, how it works, and the different types. Plus learn what causes it to shift and movements along it.

## What Is the Demand Curve?

In economics, a demand curve is a graph showing the relationship between the price of a good or service and the quantities of the good or service ‌consumers are willing to buy.

Demand curves can be straight lines or curves, but they almost always slope downward following the Law of Demand—the observation that all other things being equal, consumers will demand less of a good at higher prices and more of the good at lower prices.

As an example of the law of demand, think of oranges (or any other fruit you like) sold at a farmer's market. How many oranges would you buy if the price was $5 per orange? All else being equal, if the price per orange was$1, would you buy more or less? Your answer is likely more. The law of the demand and the downward slope of demand curves describes an inverse relationship between price and quantity demanded.

Dr. Homa Zarghamee gives a good overview of the demand curve:

## How Does the Demand Curve Work?

On a demand curve graph, you plot prices on the vertical axis (or y-axis) and quantities on the horizontal axis (or x-axis).

The demand curve below shows demand in a market for lemons. As you can see, the per unit price of lemons is on the vertical axis. The quantities demanded at various prices are shown on the horizontal axis.

Consumers in this market are willing to purchase 100 lemons at a price of $0.90. If the price falls, they are willing to buy more. For example, at$0.70, they are willing to buy 215 lemons, and at $0.40, they are willing to buy 330 lemons. Every point on a demand curve links a particular price to a specific quantity demanded. ## 2 Ways To Read a Demand Curve You can read a demand curve in two ways: ### 1. Horizontal Read In a horizontal read of the demand curve, you start with a price, move horizontally to the demand curve, and then down to the x-axis to find the associated quantity demanded. At$0.40 per lemon, consumers are willing to buy 330 lemons.

In a vertical read of the demand curve, you start with a quantity, move vertically up to the demand curve, and then across to the left to find the associated maximum price consumers are willing to pay for that quantity of the good.

## 5 Factors That Shift the Demand Curve

Demand can shift for many reasons. Below are five common determinants of demand that can shift the demand curve.

### 1. Changes in Consumer Incomes

When consumer incomes increase, demand for most goods and services increases—a rightward shift of the demand curve. Such goods and services are called normal goods. When consumer incomes decrease, demand for normal goods will decrease—a leftward shift of the demand curve. Some exceptions exist to this general rule. Inferior goods are goods and services for which demand and income move in opposite directions. Think of cheap food like boxed mac and cheese or instant noodles. When consumer incomes decrease, demand for these products will increase as consumers try to stretch their incomes further by buying cheaper (or inferior) things. When consumer incomes go up, demand for inferior goods decreases.

### 2. Changes in Consumer Preferences

Tastes and preferences also affect demand. If a product suddenly becomes fashionable, demand for it will increase—a rightward shift. Similarly, if a product loses popularity, demand will decrease—a leftward shift.

Goods and services can have complements and substitutes.

A complement is a product often consumed together with another—think hamburgers and hamburger buns. All else being equal when the price of a good decreases, demand for its complement will increase. If the price rises, demand for the complement will decrease.

Substitute goods are goods or services that can be consumed in place of other goods and services—think movie tickets at two different theaters. Ceteris paribus, if the price of a product goes up, demand for its substitute will increase since the substitute becomes relatively cheaper. The opposite is also true. If the price of a good or service goes down, demand for its substitute will decrease as the substitute becomes relatively more expensive.

### 4. Changes in Consumer Expectations About the Future

Expectations about the future can also shift consumer demand. For example, consumers might hold off on buying a smartphone, a laptop, or even a house, if they think that prices will come down in the near future. Alternatively, they might rush to the store if they hear that prices are expected to increase.

### 5. Changes in Number of Consumers & Other Demographic Changes

Last but not least, demographics and the number of buyers in a market will affect demand. If a neighborhood suddenly experiences an influx of residents, demand for drinks at the local pub may increase. If the number of people who have pets increases, demand for dog food and grooming services could increase. More generally, if the number of consumers in a market increases, demand increases, and vice versa.

## Supply and Demand

Just as you can use a demand curve to represent consumer demand, you can use a supply curve to represent the quantities sellers are willing to sell at various prices.

Together, the supply and demand curves make up the supply and demand model and can be used to model competitive markets, as well as, other market structures. Using a supply and demand model, you can identify the market equilibrium price and quantity. You can also model how the equilibrium changes if the supply and/or demand curves shift.

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