The demand curve is easy to understand from a consumer’s point of view. You don’t have to be an economist to know how it works. You can see and experience the law of demand in your daily life.
Everyone is a consumer. Each person has needs and wants – whether it is a product (potatoes, rubber shoes, energy efficient light bulbs, etc.) or a service (puppy grooming, shoe repair, teeth whitening, etc.). However, a consumer’s demand is usually bound by his income. In other words, you can only buy what you can afford based on your income. You as the consumer must decide what products and services you can purchase given your budget (income).
The demand curve is a graphical representation of this relationship between the price of a commodity with the amount of the item that consumers are willing to buy. This is an indirect or inverse relationship that economists call: the Law of Demand. Why is it inverse? Because the higher the product price demand for the product goes down. When all other things are equal, the quantity demand falls as price goes up.
Shoppers are all too familiar with the demand law. On regular days, shoppers usually forgo going to the shoe store to buy shoes at regular prices. However, on super sale days like Black Friday (which happens after Thanksgiving Day) shoppers flock to the malls to buy goods at marked down prices. Consumers are more than willing to buy an item with a lower price.
When you talk about the demand curve, you may encounter the following terms:
- Supply Law – As the price goes up the quantity of a particular commodity also goes up. If the price of this commodity goes down, the quantity supplied will also go down. There is a direct relationship between price and quantity as opposed to the inverse relationship under the law of demand.
- Income elasticity – This is the change in the demand for a certain product or service given changes in the per capita income. The price of the commodity in this case is unchanged. Only the change in the demand is measured against the increase or decrease of income. If for example income rises and the demand goes up as well, there is elasticity. On the other hand, if income rises but the demand for a particular product does not go up, there is inelasticity. This may happen for inferior products. Since consumers (whose incomes went up) can afford better, higher priced products, the demand for the inferior product will go down. Once income is elastic demand goes up; if income is considered inelastic demand will fall.
- Market equilibrium – This happens at a price wherein the quantity demanded is equivalent to the quantity supplied. If the price becomes higher than the equilibrium price, buyers will be unwilling to purchase the good resulting in a surplus. This will result in a fall of the market price. On the other hand, if the price is lower than the equilibrium price, a shortage occurs because there will be too much demand for the product or service. The market price will then tend to rise.
There may be other terms that you will encounter when trying to understand what a demand curve is. However, as a consumer, all you really have to know is that with all things equal, the demand for a product increases as prices decreases. Conversely, as prices go up, demand for the commodity will go down. You have been using the Law of Demand in your spending activities all your life without even knowing it.