Deriving the Demand Curve

A demand curve is a graph that depicts the relationship between the amount demanded of a
product and its price, assuming that the consumer's income, tastes and preferences, and the
prices of all other commodities remain constant. To construct an individual demand curve,
we need information on the pricing of a commodity at various levels, as well as the
corresponding quantities desired. The price-consumption curve can provide this information.

The above graph illustrates the way in which the individual demand curve can be derived
from the price consumption curve. Price is measured on the vertical axis, while the amount of
a commodity for which a demand curve is to be made is displayed on the horizontal axis
when drawing a demand curve.
Assume a consumer's monthly income is Rs.240. If a unit of commodity X costs Rs.60, the
relevant price line is LM1, since two units may be purchased at this price. At point e1, where
the customer buys two units of the commodity, the consumer is in equilibrium.
Assume X's price drops to Rs.40 per unit. LM2 becomes the new pricing line. The customer
reaches a new equilibrium point, e2, and purchases three units of X. As the price of X lowers
further, the budget line changes to the right, and additional points of equilibrium are reached,
such as at e3 and e4, where the consumer is in equilibrium and purchases 5 and 7 units of
product X for Rs.30 and Rs.24 per unit, respectively.
With the above information, we draw up the following demand schedule of the consumers.

Price (in Rs.) Quantity Demanded

60 2
40 3
30 5
24 7
We obtain points like Q1, Q2, Q3, and Q4 if we display the data including the particular
consumer's demand schedule. A continuous curve can readily connect these places. What we
receive is the typical customer demand curve for commodity X. The derived demand curve,
like the conventional demand curve, slopes downward from left to right.

Income and Substitution Effects – Normal and Inferior Goods

In consumer choice theory, the income effect and the substitution effects are two inter-related
economic concepts. The income effect describes how a change in relative prices impact the
changes in purchasing power on consumption, whereas the substitution effect describes how
a change in relative prices can change the pattern of consumption of related goods that can
substitute for one another.
Nominal income changes, price changes, and currency fluctuations can all cause changes in
real income. When nominal income rises without a change in prices, consumers are able to
buy more items for the same price, and demand for most commodities rises as a result.
If all prices decline (deflation) and nominal income remains constant, consumers' nominal
income may be used to buy more things. Both of these situations are quite basic. However, as
the relative prices of different commodities vary, the purchasing power of a consumer's
income varies in relation to each good, and the income impact is activated. The qualities of
the good will influence whether the income effect leads to an increase or decrease in demand.
The demand for ordinary products rises as people's wages and purchasing power rise. A
normal good is characterized as having a positive, but less than one income elasticity of
demand coefficient. The income and substitution effects both work in the same direction for
normal goods; a decrease in the relative price of the good will result in an increase in quantity
demanded, both because the good is now cheaper than substitute goods, and because the
lower price means that consumers have more total purchasing power and can increase their
overall consumption.
Consumer demand for inferior products falls as real earnings grow, or rises as incomes fall.
When an item has more expensive substitutes, demand for the good rises as society's
economy improves. The income elasticity of demand is negative for inferior products, and the
income and substitution effects act in the opposite directions.
Because of their decreased real income, consumers will want to buy other substitute goods
instead of the inferior commodity. They will also wish to consume less of any other
alternative normal products.
Inferior products are things that are considered as lesser quality yet may get the job done for
people on a short budget. Consumers desire a higher-quality product, but they must have a
higher income to afford it.
Example of Income Effect
Consider a customer who buys an inexpensive cheese sandwich for lunch at work on a
regular basis but occasionally splurges on a gourmet hot dog. If the price of a cheese
sandwich rises in comparison to the price of a hotdog, they may feel unable to splurge on a
hotdog as frequently since the greater price of their everyday cheese sandwich reduces their
real income.

In this case, the income impact outweighs the replacement effect, and a price rise for the
cheese sandwich increases demand while decreasing demand for a substitute typical product,
a hotdog, even though the hotdog's price stays same.
Upward-Sloping Demand Curve
An Upward-sloping demand curve depicts a direct rather than inverse relationship between
the price of a product and the quantity demanded per unit of time, over part or all over its
length.
The majority of demand curves are based on the premise that consumers are rational in their
purchasing decisions and have complete awareness of pricing and product features. If one of
these assumptions is changed, the demand function can result in deviation from that of
normal goods.
If price increases from OP1 to OP2, quantity demanded falls from OQ1 to OQ2. If price incre
ases from OP1 to OP2, quantity demanded increases from OQ3 to OQ4. This can be because 
of:
1) Conspicuous consumption.
2) A real or perceived belief that as price increases quality improves
3) The product is a Giffen Good.

REFERNCES:
1) https://www.economicsdiscussion.net/demand-curve/derivation/derivation-of-
individual-demand-curve-with-diagram-economics/29415
2) https://www.investopedia.com/terms/i/incomeeffect.asp
3) https://financial-dictionary.thefreedictionary.com/upward-sloping+demand+curve