A demand curve shows the relationship between price and quantity of a product that consumers are willing to buy, helping companies determine profitability. The curve is formed by plotting points of price and quantity, with all demand curves sloping downwards. A change in slope due to factors other than price is called a “change in demand”. The most significant determinant of demand is price, known as “the law of supply and demand”.
A demand curve is a graphical or mathematical diagram that shows the relationship between the price and the quantity of a product that consumers are willing to buy. In business, demand curves are useful when testing and measuring the supply and demand for certain products in a competitive market. Represented over time, demand curves help companies determine whether a particular product is actually profitable at the price point on the curve where it is in demand.
The graph of a demand curve begins with two perpendicular lines forming a right angle. The y-axis, or vertical line, represents “price” as a dependent variable, while the x-axis, or horizontal line, represents “quantity required” as an independent variable. Price increments move up along the outside of the y-axis with the highest price closest to the top. The quantity increments move left to right just below the x-axis line with the lowest digit closest to the 90° point of the angle. The increment spacing on both lines is such that straight lines drawn from each price across and up from each quantity will form perfect graphic squares within the angle; that is, there is equal spacing between units on the X and Y axes. The question points (that is, the correlative quantity for each price at which there is a buyer) are now plotted in the graph to correspond to both a price on the y which is a quantity on the x axis. By connecting the dots, the demand curve is formed. The points along the demand curve show how the quantity demanded depends on the price of the goods. Since price will always have a negative effect on consumer demand, all demand curves will slope downwards.
A shift or change in the slope of the curve due to influencing factors other than price is called a “change in demand”. These factors, or determinants, influence the consumer’s willingness to buy and, therefore, the “quantity required”. Obvious determinants include fluctuating revenues, personal preferences, anticipation of price changes, a sudden boom in market population, and price increases of complementary products or substitutes. For example, an increase in demand due to an increase in income would shift the demand curve to the right, and a decrease in demand due to a decrease in the price of a comparable substitute product would shift the demand curve to the left.
While many factors determine consumer behavior and product demand, the most significant determinant is still price. So, with all other factors held constant, as the price of a product decreases, the quantity demanded will increase, and as prices increase, the demand for a product will decrease. This principle of economic behavior is better known as “the law of supply and demand”.
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