The Demand Curve

Instructor: Alex Tabarrok, George Mason University

What is a demand curve? A demand curve illustrates on a graph how much of a particular good or service people are willing to buy as its price changes. When the

What is a demand curve? A demand curve illustrates on a graph how much of a particular good or service people are willing to buy as its price changes.

When the price for a good or service goes down, demand tends to increase. That’s why stores can look a little crazy on Black Friday: retailers cut prices to ensure that they’ll be “in the black” for the year and shoppers load up on presents for Christmas.

On a graph, the demand curve slopes downward with prices indicated on the vertical axis and the quantity demanded on the horizontal axis. Every good or service has its own demand curve, but they function the same way.

Oil is a crucial good throughout the world, so let’s take a look at its demand curve. When the price for oil is high, let’s say $55 per barrel, the quantity demanded might be five million barrels. Oil has a lot of uses, but some of them are considered low-value and there are substitute goods available. So if the price of oil is on the high end, demand for these low-value uses will be lower.

However, oil has a number of high-value uses without many substitutes. For example, planes requires oil for jet fuel. At that high price of $55 per barrel, you’re still going to need to pay up in order to fly a plane. But at that same price, drivers may opt to carpool, switch to a vehicle that can use ethanol or a hybrid car, or take fewer trips to avoid the high price of gas.

Now, when oil drops to $20 or even $5 per barrel, many more barrels are demanded. Suddenly, it makes sense to use oil instead of finding substitute goods or economizing for oil’s low-value uses.

We’ll cover more details in the video and demonstrate graphing the demand curve. But demand is only one piece of the puzzle for this first section. The supply curve and the equilibrium price and quantity are up next.

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Supply and demand are fundamental concepts in economics. Usually, they're represented by a graph like this. So what does this mean? Well, let's start with the demand curve. In short, a demand curve shows how much of a good people will want at different prices. What happens when there's a big sale? Well, at a lower price, people buy more. More shirts, more pants, more video games, and they do stuff like this. This is what happens on Black Friday when retailers lower their prices to get people to buy stuff for Christmas.

 

The demand curve illustrates the intuition for why people go nuts on Black Friday. Price is shown on the vertical axis, and quantity is shown on the horizontal. Here's the normal price, and here's the Black Friday reduced price. Simply put, the quantity demanded increases as the price gets lower.

 

But let's delve a little deeper. There's a different demand curve for every good or service out there, but the ideas are the same. So, let's look at the demand curve for one of the most important products in the world -- oil. Oil is used in a wide variety of products, from fueling cars and planes, to heating homes and making plastic for rubber duckies. Looking at the demand curve for oil, we see a familiar relationship between price and the quantity demanded. At a high price, $55 per barrel, there's a relative low demand, let's say five million barrels. At $20 per barrel, 25 million barrels are demanded. As the price goes down, the demand for oil increases. And at $5 per barrel, 50 million barrels of oil are demanded.

 

But, there's more to why the demand curve looks like this. As we mentioned before, oil has many uses. Some of those are high-value uses. Uses for which oil has few substitutes. An example would be jet fuel. Right now, you can't fly jets on corn or natural gas. If you want planes that fly, you're stuck with using oil. Other uses are low-value uses like making gasoline or plastic for these guys. When oil prices are relatively low, the oil that is being demanded is used for high and low-value goods alike. As the price of oil goes up, so does the price of making plastic and gasoline. And at some point, the cost of these value used products will get high enough that some people might skip buying a rubber ducky altogether or buy a substitute like a wooden bath toy. Same goes for gasoline, as the price rises, people will economize. They'll buy more fuel efficient cars or forego that road trip completely.

 

For these consumers, the benefit of buying these products is too little to justify the cost. At these high prices, the demanders that are left are the ones who value oil the highest. For them, the benefit of, say, having planes that fly outweighs the increased cost. They still demand oil. So, with a simple line, the demand curve summarizes all the many and diverse ways that people respond to a change in price.

 

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Show 2 Answers (Answer provided by Roman Hardgrave)
user's picture

Hi Ed, yes it is. If you have access to iTunes, that's probably the easiest way to grab the files: https://itunes.apple.com/us/podcast/mruniversity-principles-microeconomi...

If not, you can download the videos individually using the download button below the video.

Let me know if that works for you.

user's picture

There s a mistake in the wording..." as the price goes down the quantity demanded increases, not the demand ( what it should refer to a shift in the demand curve)

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user's picture

If your question is economy, then it depends on the market situation of that particular field of business. ( There can be recession or good demand in that particular field. Again depending on the field ). And on a bigger picture if there is recession in the whole economy then it will affect all the businesses even if there is good demand in a particular field, because the sentiments of businesses go down to buy goods as there is a possibility of less sales due to recession. Sometimes 40% of recession is just because of people's state of mind towards it. People tend to do less economic activities and take less risks at the period of recession which overall results into lower gdp / and increase in recession.

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"Given the way we now teach supply and demand, it makes more sense to have price on the horizontal axis. The price is viewed as the variable that determines quantity supplied and quantity demanded, and we usually put the dependent variable (which here is quantity) on the vertical axis" (Mankiw)

We have price on the vertical axis because that's how Alfred Marshall (1890) drew his graphs in Principles of Economics. For better or worse, Principles was hugely influential. And so the present-day convention is Marshall's convention.

https://hsm.stackexchange.com/questions/140/why-is-price-on-the-vertical...

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