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The law of demand is one of the fundamental laws of economics. This establishes that, in general, there is an inverse relationship between the price of a good and the quantity demanded of it in a market; Therefore, as the price increases, the quantity demanded decreases, while as the price decreases, the quantity demanded increases.
Understanding the law of demand and the factors involved in the price-demand relationship is an important part of analyzing markets. It is directly related to the behavior of consumers, since, ultimately, these are the ones who buy the products and services. In this sense, the graphic visualization of the law of demand is of great importance , and it is there where the demand curve enters.
What is the demand curve?
The demand curve is a graphical representation of the relationship between the price of a good and the quantity of that good that is bought in a market, that is, the quantity demanded . It is a two-dimensional graph in which the price (P X ) of a good X is plotted on the vertical axis or axis of the ordinates, while on the horizontal axis the quantity demanded of said good is represented in a defined period of time. time (Q X ).
In this sense, the curve represents the union of all the possible combinations of prices and their respective quantities demanded, given a set of fixed conditions related to the other factors that determine demand.
In short, we can say that the demand curve consists of a graphical representation of the demand function for a good in which the only independent variable that changes is the price .
The following figure shows two examples of demand curves for any good X with different shapes:
As we can see in the two previous examples, the demand “curve” does not necessarily have to be a curve, in the sense that it can also consist of a linear function (see demand curve (a) in the previous figure). However, both mathematicians and economists often refer to graphs of continuous functions as curves, regardless of whether they are smooth curves (such as curve (b) in the figure above) or not.
Both of the above examples show the expected typical behavior of the law of demand. Although its functional behavior (speaking in mathematical terms) may be different, we can clearly see that as the price decreases (that is, we move down the curve), the quantity demanded increases, and vice versa. .
The Demand Curve and the Ceteris Paribus Assumption
A demand curve should only represent the behavior of demand in a market as a function of the price of the product or good that is being considered. This means that the curve shows how the price affects the decision of consumers when buying.
However, a consumer’s decision to buy or not a certain product depends on many factors, its price being only one of them. Other key factors are the quality of a product, the existence of substitute or complementary products and their respective prices, the total population that participates in the market, income levels and consumer tastes, among others.
This means that we can see the demand function as a mathematical function that depends on several (potentially many) variables, which can be expressed as:
Where Q X is the quantity demanded of good X, P X is its price, P Y is the price of a related product whose price affects the demand for X (a substitute or complementary product), I is in income per capita, G represents the tastes of consumers and P the population.
This means that a change in Q X could be due to a number of factors other than the price of X. To avoid this apparent contradiction, and since the demand curve only seeks to represent the effect of price on the demand for a good, and not the effect of other factors that may also affect it, when drawing a demand curve it is assumed that all other factors remain constant or invariant. This is called the ceteris paribus assumption , which literally means that everything else remains the same.
Thus, we can then define the demand curve as the graphical representation of the variation in the quantity demanded of a good as a function of the price of said good, ceteris paribus , which can be represented mathematically as:
Where the bars over the other variables indicate that these variables remain constant, so only P X varies.
The above definition of the demand curve implies that when we move along the demand curve, we automatically assume that the only variable that is changing and therefore affecting the quantity demanded is the price of X.
Shifts in Demand Curves
As we have just seen, a demand curve is defined for a set of pre-established conditions that are assumed to be constant as the price and quantity demanded of a good change. However, it is worth asking what happens when one (or several) of the determining factors of demand, in addition to price, changes.
As expected, a change in any of these factors will affect the quantity purchased or demanded of the good we are considering. However, since the price is not changing in this case, then we see a horizontal movement on the demand curve graph, instead of a movement along the curve.
This type of displacement takes us to a new set of conditions different from the initial ones, so it takes us to a point on a new demand curve. In other words, if, having reached the new point, we now change the price of X, ceteris paribus (all else constant), we will move along a new demand curve which will be shifted relative to the supply curve. original demand, as shown in the following figure.
In the previous figure we can observe two different types of shift of the demand curves.
Outward shifts of the demand curve
In graph (a) of the previous figure we can see that at price P 1 , the variation of some other factor that increases the quantity demanded of X takes us from Q 1 to Q’ 1 while at price P 2 the quantity demanded increases from Q 2 to Q’ 2 . Both points fall on a new demand curve that is to the right of the original curve (D’), thus consisting of a shift to the right or out of demand.
An example of a factor that can cause an outward shift of the demand curve is income, since if people earn more money, they will generally spend more, thus buying more units of X. Another factor is population because , if the population increases, the number of buyers in the market will increase and, therefore, the number of total units that will be purchased will increase (assuming, of course, that other factors such as per capita income, tastes, etc. . remain constant).
Inward Shifts of the Demand Curve
In the case of (b), the opposite occurs as before. If any factor other than the price of X negatively affects the quantity demanded, this will cause the demand curve to shift to the left from D to D”, which we call an inward shift.
An example of a factor that can cause this type of displacement is the increase in the price of a complementary good. For example, if X refers to tennis rackets, then the price of tennis balls may affect the demand for the rackets. This is because rackets and balls are complementary goods: both are needed to be able to play tennis. If the price of tennis balls increases, this will not only decrease the quantity of balls demanded (thus following the law of demand), but will also decrease the quantity of rackets demanded.
Changes in Demand vs. Changes in Quantity Demanded
To finish our explanation of the demand curve, it is worth noting the difference between the expressions “ changes in demand ” and “ changes in the quantity demanded. ” At first glance, it seems that both terms refer to the same thing, but it is not.
The term demand is used in economics to refer to the demand function in general , that is, to the function that depends on a set of determinants other than price and that, therefore, determines the position of the demand curve. . This is why, when we talk about shifting the demand curve outward or inward, we can also talk about an increase or decrease in demand .
Instead, the concept of change in quantity demanded is only associated with changes in price when all other determinants of demand remain constant. In other words, these are the changes that occur solely due to changes in the price of the good under consideration and that, therefore, take us from one point to another on the same demand curve .
The following figure illustrates the difference between these two concepts:
The horizontal displacements from point A to A’ and from point B to B’ (green and red arrows) consist of changes in demand , since they involve changes in demand produced by factors other than price and, therefore, we lead to new demand curves.
Instead, the shift from point A to B along the central demand curve (blue arrow) in which the quantity demanded of X changes from Q A to Q B , corresponds to changes generated solely by the price decrease. of good X. Therefore, this case corresponds to a change in the quantity demanded of X .
The Demand Curve and Giffen Goods
As mentioned at the beginning, most goods comply with the law of demand. For this reason, the demand curve for normal goods always slopes downward. However, there is a special class of goods that economists have confirmed exhibits the opposite behavior, that is, goods for which demand increases when they become more expensive.
These kinds of goods are called Giffen goods and, unlike normal goods, they exhibit an upward-sloping demand curve .
There are several examples of goods that have behaved in this way in different periods of history. These goods have in common that they are inferior goods, without close substitute products and that they represent an important part of the families’ income. In this sense, they are usually staple products and available in very limited quantities during periods of scarcity in which their direct substitutes are either unavailable or even more expensive than Giffen goods.
Examples of Giffen goods
Some examples of Giffen goods that show upward-sloping demand curves are:
- Potatoes or potatoes in Ireland during the famine between 1845 and 1849.
- Rice and wheat in the Chinese provinces of Hunan and Gansu in 2007.
References
Billin. (2020, May 29). What is the Demand Curve | Glossary . https://www.billin.net/glossary/demand-curve-definition/
Economy and Development. (2016a, January 4). Demand curve shift | Chap. 2 – Microeconomics . Youtube. https://www.youtube.com/watch?v=UkfqTPP_tNI
Economy and Development. (2016b, September 22). How do you get the demand curve? | Chap. 31 – Microeconomics . Youtube. https://www.youtube.com/watch?v=bJpmKPeK9AE
Khan Academy. (nd). What factors modify demand? (article) . https://en.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/demand-curve-tutorial/a/what-factors-change-demand
Miller, LRR, Meiners, RE, & Miller, RL (1992). Microeconomics . McGraw-Hill Companies.
Munárriz, IG (2021, December 19). Good Giffen . Economic Science. https://www.lacienciaeconomica.com/bien-giffen-definicion-y-ejemplos/
