What Are They, Types, and Example

What Is the Demand Curve?

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price appears on the left vertical axis while the quantity demanded is on the horizontal axis. 

A demand curve doesn’t look the same for every product or service. When the price rises, demand generally falls for almost any good, but the drop is much greater for some goods than for others. This is a reflection of the price elasticity of demand, a measurement of the change in consumption of a product in relation to a change in its price. The elasticity of demand for products varies between and within product categories, depending on the product’s substitutability.

Understanding the Demand Curve

As noted above, the demand curve is a commonly used graph that represents the relationship between prices and the total quantity of goods and services demanded over a certain period of time. Prices normally appear on the y-axis while demand is depicted on the x-axis.

This curve generally moves downward from the left to the right. This movement expresses the law of demand, which states that as the price of a given commodity increases, the quantity demanded decreases as long as all else is equal.

Note that this formulation implies that price is the independent variable, and quantity is the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.

For example, if the price of corn rises, consumers will have an incentive to buy less corn and substitute other foods for it, so the total quantity of corn that consumers demand will fall.

Types of Demand Curve

There are two types of demand curve: an individual demand curve and a market demand curve.

Individual Demand Curve

An individual demand curve is one that examines the price-quantity relationship for an individual consumer, or how much of a product an individual will buy given a particular price.

Let’s say the price of a slice of pizza is $1.50 and Joel is accustomed to buying four slices for lunch every workday (4 x $1.50 x 5 = $30). If the price drops to $1 a slice, four slices will cost Joel $20 (4 x $1 x 5), and Joel might demand six slices instead of four.

But if the price drops to 75 cents a slice, he might demand eight slices a day. With the price information and the number of slices Joel will demand at that price, it would be possible to plot an individual demand curve.

Market Demand Curve

The demand curve plots out the demand for an individual consumer, hence the name individual demand curve. But they don’t take entire markets into account. That’s where the market demand curve comes in.

A market demand curve is the summation of the individual demand curves in a given market. It shows the quantity of a good demanded by all individuals at varying price points. Keep in mind that this graph doesn’t outline what consumers want. Rather, it depicts the goods and services they’ll buy if they purchasing power to do so.

Determining the market demand curve is as easy as adding up all of the individual demand curves. This is then plotted along the horizontal or x-axis of the graph. Unlike individual demand curves, which are generally steeper, market demand curves tend to be flatter. That’s because demand in the market is more proportionate as prices change compared to changes in individual demand.

Demand Elasticity

The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand. If a 50% rise in corn prices causes the quantity of corn demanded to fall by 50%, the demand elasticity of corn is 1. If a 50% rise in corn prices only decreases the quantity demanded by 10%, the demand elasticity is 0.2. Elasticity measures how demand shifts when economic factors change. When demand remains constant regardless of price changes, it is called inelasticity.

Elastic Demand Curve

The demand curve is shallower (closer to the horizontal axis) for products with more elastic demand. Goods with more elastic demand are those for which a change in price leads to a significant shift in demand. Elastic goods include luxury products and consumer discretionary items, such as a brand of a candy bar or cereal. Food items are easily substituted, and brand-name products are easily replaced by items that are lower in price.

Inelastic Demand Curve

The demand curve for items that are less elastic or inelastic is steeper (closer to the vertical axis). Inelastic goods are generally necessities, for which there are few, if any, substitutes. Common examples are utilities, prescription drugs, and tobacco products. Demand often remains constant for these items despite price changes.

Factors That Shift the Demand Curve

If a factor besides price or quantity changes, a new demand curve needs to be drawn. For example, say that the population of an area explodes, increasing the number of mouths to feed. In this scenario, more corn will be demanded even if the price remains the same, meaning that the curve itself shifts to the right (D₂) in the graph below. In other words, demand will increase.

Other factors can shift the demand curve as well, such as a change in consumers’ preferences. For instance:

• If cultural shifts cause the market to shun corn in favor of quinoa, the demand curve will shift to the left (D₃).
• If consumers’ income drops, decreasing their ability to buy corn, demand will shift left (D₃). 
• If the price of a substitute—from the consumer’s perspective—increases, consumers will buy corn instead, and demand will shift right (D₂).
• If the price of a complement, such as charcoal to grill corn, increases, demand will shift left (D₃). 
• If the future price of corn is higher than the current price, the demand will temporarily shift to the right (D₂), since consumers have the incentive to buy now before the price rises.

Exceptions to the Demand Curve

There are some exceptions to the rules that apply to the relationship that exists between prices of goods and demand. Two of these are Giffen goods and Veblen goods.

Giffen Goods

A Giffen good is a non-luxury product for which there is no viable substitute—for example, a staple food, like bread or rice. In short, the demand increases for a Giffen good when the price increases and it falls when the price drops.

The demand for these goods is on an upward slope, which goes against the laws of demand. Therefore, the typical response (rising prices triggering a substitution effect) won’t exist for Giffen goods, and the price rise will continue to push demand. 

Veblen Goods

Veblen goods are those for which demand rises even as the price rises because of the exclusive nature and appeal of these products as status symbols. Like the demand curve for a Giffen good, a Veblen good has an upward-sloping demand curve (in contrast to the usual downward-sloping curve).

Veblen goods are generally luxury items, such as cars, yachts, fine wines, and designer jewelry, that are high quality and out of reach for the majority of consumers. It is named after American economist Thorstein Veblen, who is best known for introducing the term “conspicuous consumption.”

The Bottom Line

A demand curve is a graphic display of the change in demand of a good resulting from a change in price in a given time period. On the demand curve graph, the vertical axis denotes the price and the horizontal axis denotes the quantity demanded. A demand curve can be a useful business tool because it can show the prices at which consumers start buying less or more. It can also point out the prices at which a company can maintain consumer demand and earn reasonable profits.