Demand Curves Essay

This essay has a total of 837 words and 4 pages.

Demand Curves

Demand is "the quantity of a commodity that will be required at any given price over some
given period of time". "For the majority of the goods and services, experience shows that
the quantity demanded will increase as the price falls." (Stanlake 155) This
characteristic can be shown by a demand curve. A demand curve is a graphical
representation of the data in table with values of demand called a demand schedule. A good
that is in greater demand do to income increases is known as a normal good. A inferior
good is a good that is in less demand even though the income increases. When this
situation occurs the demand curve is positive sloping. A giffen good is a special type of
inferior good where demand increases when price increases. The graph below is a sample
demand curve, where the demand schedule for the quantity of toilet paper demanded is

From this graph we can determine how many rolls of toilet paper will be purchased at what
price. As can be seen from looking at this graph, it is negatively sloping. As one
variable gets larger the other will become smaller, or when the price drops more is
purchased. The whole demand curve "theory" is based on human behavior. It is logical to
say that people will purchase more of a product when the price is cheaper.

In reality, if the price of a good rises the income (or assets) of the consumer will
decrease. The people would not be able to buy the same goods as before because they cost
more. Consumers can do two things; if the good is a normal good (previously defined), they
would buy less of the good; if the good is an inferior good, they would buy more of the
good. Thus, the income effect can be defined in this statement: When the price of a good
falls, the expected outcome would be that the consumers would buy more because they have
the money and can afford to buy more.

The slope of the demand curve can be explained in terms of the income and substitution effects.

If the price of a good falls consumers would buy more of that good and less of others. If
the price of a good rises people would buy less of that good and more of another because
the good is more expensive than others. The outcome of these would be a switching of
purchases towards the cheaper product. When there is another similar good that is in price
competition with an existing good, it is known as the substitution effect. Most demand
curves slope downwards from left to right and therefore obey the general law that more
goods would be demanded at lower prices. However there are certain demand curves that do
just the opposite and slope in the other direction, which will be explained later.

For a normal good the substitution and income effects both go in the same directions. A
rise in the price reduces in the quantity demanded because the price has risen. For a
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