Demand Curve and Nature of Curves

Demand Curve is a line that shows how many units of a good or service will be purchased at each possible price. The price is plotted on the vertical (Y) axis while the quantity is plotted on the horizontal (X) axis.

Demand curves are used to determine the relationship between price and quantity and follows the law of demand, which states that the quantity demanded will decrease as the price increases. In addition, demand curves are commonly combined with supply curves to determine the equilibrium price and equilibrium quantity of the market.

Drawing a Demand Curve

The demand curve is based on the demand schedule. The demand schedule shows exactly how many units of a good or service will be purchased at different price points.

For example, below is the demand schedule for high-quality organic bread: 

It is important to note that as the price decreases, the quantity demanded increases. The relationship follows the law of demand. Intuitively, if the price for a good or service is lower, there would be a higher demand for it.

From the demand schedule above, the graph can be created:

Through the demand curve, the relationship between price and quantity demanded is clearly illustrated. As the price for notebooks decreases, the demand for notebooks increases.

Shifts in Demand Curve

Shifts in the demand curve are strictly affected by consumer interest. Several factors can lead to a shift in the curve, for example:

• Changes in income levels

If the good is a normal good, higher income levels would lead to an outward shift of the demand curve while lower income levels will lead to an inward shift. When income is increased, demand for normal goods or services will increase.

• Changes in the market’s size

A growing market results in an outward shift of the demand curve while a shrinking market results in an inward shift. A larger market size results from more consumers. Therefore, the demand (due to more consumers) will increase.

• Changes in the price of related goods and services

When the price of complementary good decreases, the demand curve will shift outwards. Alternatively, if the price of complementary good increases, the curve will shift inwards. The opposite is true for substitute goods. For example, if the price for peanut butter goes down significantly, the demand for its complementary good – jelly – increases.

Example of a Shift in the Demand Curve

Recall the demand schedule for high-quality organic bread:

Assume that the price of a complementary good – peanut butter – decreases. How would this affect the demand curve for high-quality organic bread?

Since peanut butter is a complementary good to high-quality organic bread, a decrease in the price of peanut butter would increase the quantity demanded of high-quality organic bread. When consumers buy peanut butter, organic bread is also bought (hence, complementary). If the price of peanut butter decreases, more consumers would purchase peanut butter. Therefore, consumers would also purchase more high-quality organic bread as it is a complement to peanut butter.

We can see from the chart above that a decrease in the price of a complementary good would increase the quantity demanded of high-quality organic bread.

Movements Along the Demand Curve:

Changes in price cause movements along the demand curve. Following the original demand schedule for high-quality organic bread, assume the price is set 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.

Nature of Curves:

Demand Curve represents the relationship between the price of a good or service and the quantity demanded by consumers at those prices. It is typically downward-sloping, indicating that as the price decreases, the quantity demanded increases, and vice versa.

1. Downward-Sloping Demand Curve

• Nature:

The most common type of demand curve, it slopes downwards from left to right. This represents the Law of Demand, where a decrease in price leads to an increase in quantity demanded and vice versa.

• Reason:

The negative slope occurs due to the substitution effect (where consumers switch to cheaper alternatives when prices rise) and the income effect (where lower prices increase consumers’ real income, enabling them to buy more of the good).

• Example:

If the price of a coffee cup decreases from ₹100 to ₹80, the quantity demanded increases from 10 cups to 15 cups.

2. Vertical Demand Curve (Perfectly Inelastic Demand)

• Nature:

A vertical demand curve indicates that the quantity demanded remains constant regardless of any price change. This is referred to as perfectly inelastic demand.

• Reason:

This occurs when the good is essential and has no close substitutes, so consumers will continue to buy the same quantity even if the price increases or decreases. For example, life-saving drugs like insulin.

• Example:

Whether the price of insulin increases or decreases, the quantity demanded remains unchanged because patients need it to survive.

3. Horizontal Demand Curve (Perfectly Elastic Demand)

• Nature:

A horizontal demand curve reflects perfectly elastic demand, meaning that any change in price will cause the quantity demanded to drop to zero.

• Reason:

This occurs in markets with perfect substitutes, where consumers are willing to buy any quantity at a specific price but none at a higher price. A small price increase causes a complete drop in demand, as consumers can switch to identical products at a lower price.

• Example:

In a perfectly competitive market for a commodity like wheat, if one seller raises the price even slightly, all consumers will switch to other sellers offering the same price.

4. Steep Demand Curve (Inelastic Demand)

• Nature:

A steep demand curve shows that demand is inelastic—i.e., changes in price result in relatively small changes in quantity demanded. In other words, consumers are not highly responsive to price changes.

• Reason:

This occurs when the good is a necessity with few or no substitutes, such as petrol or basic utilities. Consumers will continue purchasing relatively the same amount even if prices increase.

• Example:

If the price of petrol increases from ₹80 to ₹100, the quantity demanded might decrease only slightly, as consumers cannot easily reduce their consumption.

5. Flat Demand Curve (Elastic Demand)

• Nature:

A flat or less steep demand curve indicates that demand is elastic. In this case, small changes in price lead to significant changes in quantity demanded.

• Reason:

This typically happens when there are many substitutes available or when the good is not a necessity, meaning consumers can easily switch to other alternatives if the price changes.

• Example:

If the price of a specific brand of tea drops from ₹60 to ₹40, the quantity demanded could increase dramatically as consumers may switch from other brands to the cheaper one.

6. Backward-Bending Demand Curve

• Nature:

A backward-bending demand curve is rare and typically applies to labor markets, where the quantity demanded of labor decreases as wages increase beyond a certain point. This curve initially slopes upward (normal demand behavior), but then begins to slope backward as the wage increases.

• Reason:

At low wages, higher wages attract more workers (following the law of demand). However, at higher wages, workers may prefer to work less because they can achieve their desired income with fewer working hours, leading to a decrease in the number of workers demanded.

• Example:

If wages for manual labor increase to a high level, workers may decide to work fewer hours, as they can meet their income goals without working as much.